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Volatility, Stock Market Seasonality on a Collison Course

The VIX is nearing 12, which could precede a short-term spike as July expiration nears

Managing Editor
Jul 8, 2024 at 9:14 AM
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"The US equity gauge is poised to plunge to 4,200 by year-end, a roughly 23% drop from Thursday’s close around 5,483," the bank’s chief market strategist and his team said Friday in a mid-year outlook. It surpassed the 5,500 mark in early trading Friday after a key measure of US inflation showed signs of cooling.

- Monday Morning Outlook, July 1, 2024

The above words from Marko Kolanovic, J.P. Morgan’s (JPM) chief market strategist, co-head of global research, and one of Wall Street’s most notorious stock market bears kicked off last week's commentary as well. They are still interesting one week later, as Kolanovic announced he would be leaving the bank to "explore other opportunities" on Wednesday, just ahead of Thursday's earnings.

Why does this matter? J.P. Morgan was steadfast in its anticipation of a selloff, even as bank giants Goldman Sachs (GS), Citigroup (C), and Bank of America (BAC) all lifted their outlooks amid an improving broad market technical backdrop. Per Bloomberg, JPMorgan has the lowest 2024 target for the S&P 500 Index (SPX5,567.19) among banks it tracks at 4,200.

“'It just might come one day out of the blue. This has happened in the past, we’ve had flash crashes,' Lakos-Bujos said in a webinar. 'One big fund starts de-levering some positions, a second fund hears that and tries to re-position, the third fund basically gets caught off guard, and the next thing you know, we start having a bigger and bigger momentum unwind.'”

- Bloomberg, March 27, 2024

Filling the role will be Dubravko Lakos-Bujas, whose quote above is from an article back in late March. While comments such as these don’t necessarily tip his hand about the type of chief market strategist he’ll be at JPM, it is notable that he seems to be cut from the same cloth as his predecessor, from a macroeconomic perspective.

But C-suite shakeups – even if Kolanovic left on his own accord – usually precede a shift in sentiment and policy change. Keep an eye out in the coming weeks to see if there's a more bullish-than-usual outlook rhetoric from JPMorgan, and if there are ever some upwardly-revised projections, treat it like a green light. 

Bullish Seasonality Ahead

The SPX rattled off a 1.95% win for the week in route to a record close on Friday, and looking at some of Senior Market Strategist Matthew Timpane's markers from last week, the 20-day moving average wasn’t even close to a threat over the past five trading days. Meanwhile, 5,368 -- the 161.8% Fibonacci extension from the 2022 market correction, is now in gimme territory.

Even better news is that though the holiday-shortened seasonality from Fourth of July is in the rearview mirror. For the next 10 trading days we are still in a historically bullish period leading up to July standard expiration. Timpane notes that over the last 20 years, the SPX averaged a return of 0.9% during the next two weeks. Since 1990, the average return flattens out a little to 0.6%, but when you factor in election years since 1990, the average return perks back up to 0.7%.

Short-Term VIX Spike? Be Prepared

However, the next two weeks also tend to see volatility kicking back in, but consider the caveat that the Cboe Volatility Index (VIX12.48) hasn’t closed above 14 since May 30. Once we’re through standard expiration on July 19, we’re back to sluggish VIX behavior, historically.

Timpane did notice on Friday a bid on the VIX off 12, even as the SPX wrapped up a fourth-straight win and close above 5,550 for the first time ever. Remember -- that 11.50 is half the VIX’s October 2023 peak that preceded the perceived Federal Reserve's pivot to lower rates that kicked off a rally.

Schaeffer’s Senior V.P. of Research Todd Salamone has been tracking bounces from 12 in the past, per the excerpt below from the May 20 commentary.

"Since the first day of the month, the VIX has tracked lower, moving below the 2023 close at 12.45. And on Friday, the VIX closed at its lowest level since November 2019 and just above the intraday lows of December 2023. The Friday close is just above 11.54, which is one-half its October 2023 peak, and might help explain why a trough was made in this area in December 2023.

As such, a risk to bulls is the VIX lifting sharply off these prior lows amid lower stock prices. A move above 12.45 might be the first hint of trouble. At the same time, if the VIX moves below recent lows, a move to 10.68, or one-half the April intraday high, is not out of the question. A decline to this level would likely occur in the context of a continuation move after the S&P 500 Index’s (SPX—5,303.27) breakout above all-time highs last week."

- Monday Morning Outlook, May 20, 2024

McClellan Summation Index

If you’re looking for another short-term bullish signal, consider the Nasdaq Composite’s (IXIC — 18,352.76) McClellan Summation Index, a market breadth indicator that tracks advances and declines. According to the chart below, it's on the verge of clearing its 8-day displaced moving average for the first time since mid-May.

Nasdaq McClellan

Also note in this chart below that the New York Stock Exchange (NYSE — 18,090.90) has already cleared this trendline. Since this index measures the strength of an uptrend, clearing this short-term hurdle that has been in place for roughly two months is an encouraging indicator if you’re a bull.

NYSE McClellan

Recent SPY Action

In the options pits, the SPDR S&P 500 ETF Trust (SPY—554.64) broke through the call wall at the 550-strike last week. Timpane nailed it – 550 turned out to be a manageable wall that was taken out Thursday and then saw some separation on Friday. He also noted nothing else stuck out as a clear lid on price action, and stacked put levels below could act supportive into July options expiration. Fast forward to a week later, and that sentiment still stands.

Looking Ahead

A double-dose of inflation data in the coming week – June’s consumer price index (CPI) on Thursday, the producer price index (PPI) on Friday – will keep investors on their toes, as will any earnings surprises from JPMorgan, Citigroup, or Delta Air Lines. (DAL). Given the VIX backdrop, be on the lookout for potential mid-week volatility, considering Fed Chair Jerome Powell gives his two-day congressional testimony on Tuesday and Wednesday. Friday’s consumer sentiment reading will also move the needle.

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