Stocks Rally As The Implied Catches Up With Realized Volatility
2022.05.03 09:20
Stocks were volatile Monday, but the S&P 500 managed to finish the day higher, by roughly 60 bps, to regain some of Friday’s losses. The index fell short of rising above resistance at 4,160.
Still, Tuesday is the most challenging day because the FOMC meeting will come on Wednesday afternoon, and I think the Fed is likely to hike by the 50 bps and announce $95 billion per month in the balance sheet run-off.
An inline announcement should be enough to bring the VIX back into the 20’s and send the S&P 500 higher, back to 4,300.
S&P 500 Index Daily Chart
If the Fed turns out to be more hawkish and Powell signals something worse than expected at the press conference, then my whole theory goes away.
But based on what I have heard up until now, I don’t think the Fed is going to go with a shock and awe approach, so I think there will be very few, if any, surprises.
Additionally, with the VIX at 32, the market will need to see bigger declines in the days ahead, otherwise, realized volatility will eventually drag implied volatility lower, which means a lower VIX and higher S&P 500.
VIX Index Daily Chart
This time, I think a rally will be much shorter than the March rally, as there are fewer outside events happening with no OPEX and quarter-end rebalancing.
Additionally, real yields are moving up now, and the 10-Year TIP rate was trading at a positive 15 bps yesterday, which sent the iShares TIPS Bond ETF (NYSE:TIP) plunging by 2.2%.
So with the TIP ETF making new lows, it seemed hard to imagine that the Invesco QQQ Trust (NASDAQ:QQQ) or SPDR® S&P 500 (NYSE:SPY) can’t get far, especially if the TIP ETF continues to drop.
TIP ETF Daily Chart
ARK Innovation ETF
The early tell today that something was changing in the market was that the ARK Innovation ETF (NYSE:ARKK) sector was holding up despite a sell-off in the S&P 500 and NASDAQ. But until the ETF can clear that $55 region, a rally in this ETF doesn’t mean much of anything.
ARK Innovation ETF Daily Chart
PayPal
PayPal Holdings (NASDAQ:PYPL) was up Monday too, and was getting close to clearing resistance around $92. A breakout was looming following its disappointing results, and there was the potential for a move above $105.
PayPal Holdings Daily Chart
