Volatility had been contracting but now is back at its 50 day moving average. Where does it go from ... [+]
Key Takeaways
- Stocks Weak Across the Board
- Bond Yields Falling
- What’s Next for Volatility
It’s been a rough start to the week for stocks. As we approach the midway point, the S&P 500 is down over 3.5% while the Nasdaq 100 is down closer to 4%. Even the Dow Jones Industrial Average, which has held up best this year, has given up nearly 2.5%. Peel back the onion a little and you’ll find some big name companies having a tough week.
Despite an easing on Covid lockdowns in China, shares of Apple
Although this week has lacked any big name earnings or economic data, we did get some bad news from banking leaders yesterday. Their outlook for the first half of 2023 was pretty negative with warnings of a possible severe recession. Yesterday alone accounted for 1.5% of this week’s losses in the S&P 500. But that news could potentially be offset today by a report out of UBS which suggests shelter inflation, or what is essentially rent prices, may have peaked. Shelter inflation is a large contributor to the CPI and if prices there begin falling, it could be a sign inflation overall is coming down. A possible confirmation of easing inflation can also be seen in the bond market.
After hitting a high of 4.21% in late October, yields on the benchmark 10 year note are now down to 3.52%. Although the Fed has given no indication on plans to stop raising rates anytime soon, the fall in yields may suggest, when it comes to inflation, the worst is behind us. Certainly the fall in oil prices, which are down 40% since the beginning of summer has helped. One caveat to oil prices; however, new price caps being put in place could potentially impact supplies, leading to unintended consequences with respect to price. Therefore, this is something I’m close monitoring.
I’m also closely watching volatility. The VIX closed Tuesday at a little over 22. That puts it right at its 50 day moving average. It will be interesting to see if that spurs more volatility buyers or sellers in the coming days, especially as quadruple witching approaches next week. Next Friday is expiration for index futures, options on futures, stock options and index options. Quadruple witching can bring more volatility with it, especially as we close out what has been a rough year.
Many investors use December to sell out losing positions as offsets to their winners. This is what is known as tax-loss selling. While markets haven’t offered many winners this year, losses can be carried forward for tax purposes. Because of that, I wouldn’t be too surprised if we begin seeing some tax loss selling take place and quadruple witching could act as a catalyst for that. Again though, this is why I am always talking about sticking with your long term objectives. Traders have a saying, “markets move,” and instead of guessing those moves in advance, I find it far easier to just stick to your investing plan.
tastytrade, Inc. commentary for educational purposes only.
