Hurricane Ian is bearing down on Florida forcing Disney to close theme parks. (Photo by Chip ... [+]
Key Takeaways
- Bank of England Launches Surprise QE
- Housing and Economy Cooling
- Volatility Reaching Extreme Levels
It’s been a rough start to the week for markets. The S&P 500 ended Tuesday down a little more than 1% for the week so far, while the Nasdaq 100 is down just under 1%. At the same time, volatility continues climbing with the VIX now trading just over 33 in the premarket.
With all the negative news and fall in prices, bulls are calling for a bottom. However, market bottoms tend to be marked by panic selling and we really haven’t seen that yet, in my opinion. On Friday, we did see what felt like panic selling early in the day, but that was quickly met with opportunistic buying. It didn’t feel like the type of panic selling that accompanies a true market bottom.
In a surprise move overnight, the Bank of England announced they would not only hold off on plans to sell existing bond holdings, but they would launch a temporary round of quantitative easing. The BOE will embark on a short term bond buying program of longer dated maturities. News of the program initially caused equity futures to recoup overnight losses, sent the US dollar lower and bonds higher in premarket trading; however, there isn’t much reason to believe the US will follow suit with any sort of QE.
Speaking yesterday, Federal Reserve Bank of Minneapolis President Neel Kashkari said the Fed needs to continue raising interest rates until evidence emerges underlying inflation is declining. He said the Fed will then need to wait and see that inflation is under control before taking any next steps.
Meanwhile, evidence continues to mount that the economy is indeed slowing. Housing prices fell for the first time in ten years on a seasonally adjusted basis from June to July. Although the decrease was negligible at just 0.2%, it is a sign of cooling in the market. At the same time, lumber futures prices are now down 70% from March highs. Lumber futures are often viewed as an indicator for housing demand and the steep fall in prices may be a precursor to a further slowdown in housing.
The pace of hiring is also showing further signs of slowing. Lyft
Apple also delivered surprising news overnight. The tech giant announced it was backing off plans to increase production of the iPhone 14. Demand for the phone, especially the base model, has not been what the company anticipated thus far. News of the production changes sent the stock down $5 in premarket trading.
When it rains, it pours. Literally. Hurricane Ian picked up speed overnight and has been upgraded to a category four. As it nears Florida, Disney announced it was closing their theme parks in advance of the storm hitting. Disney stock is down slightly in the premarket.
Finally, I want to come back to the VIX. The VIX has a historical average of around 18. That translates into a roughly 1% expected daily move in equity prices. With it just over 33, that means stocks have a daily expected range of nearly 2%, which is substantial. For the S&P 500, that means a possible move of 70 points in either direction, or 140 points of total range. These types of VIX readings are extremely rare and imply the market is looking for a catalyst that either sends markets higher or breaks the proverbial camel’s back. Unfortunately, those catalysts tend to be unforeseen. Therefore, I’m going to reiterate the importance of sticking with your investing plan and time horizon. While I recognize that becomes increasingly challenging when markets get choppy, it also becomes increasingly important.
tastytrade, Inc. commentary for educational purposes only.
