Investors now see the flip side of low volatility

Alan Valdes
·Alan Valdes

By Alan Valdes, Director of Floor Operations at Silverbear Capital

What a week! Today began as another run at the all-time highs for the major indexes. But a JPMorgan (JPM) analyst note threw cold water on the rally. Marko Kolanovic highlighted the similarities between the current market and those in 1993 and 2000. Since the note was circulated by email, the Nasdaq has flipped into solidly negative territory while the VIX (^VIX, VXX) has soared by the largest amount in six weeks (hitting 11.26).

The VIX ‘fear index’ just spiked by the largest amount in six weeks after a JPMorgan note warned of low volatility. (Source: Yahoo Finance)
The VIX ‘fear index’ just spiked by the largest amount in six weeks after a JPMorgan note warned of low volatility. (Source: Yahoo Finance)

There are still earnings to contend with

As of today, 47% of S&P companies have reported actual results, and they have been pretty impressive. As it stands, 75% have beat their consensus EPS estimates, and 73% have beat on revenue. This earnings season has kept the rally in motion, sending the indexes (^GSPC, SPY, ^IXIC, QQQ, ^DJI, DIA) to new highs almost daily.

We get a slew of earnings from some leading names in the corporate world today, including, Comcast (CMCSA), Dow (DOW), Verizon (VZ), Amazon (AMZN), and Starbucks (SBUX). Amazon, which reports after the bell, has some analysts wondering if the proposed Whole Foods deal would push the stock price above $2,000, setting it on a path to becoming the first trillion dollar company. By the time traders head home for the weekend tomorrow, over half of the S&P 500 companies will have reported and 1/3 of those, will have reported this week alone.

Economic data and the Fed

Although earnings news dominates, we did get some government stats today on the economy, including Initial Jobless Claims, which came in a little higher at 244,000 vs. estimates of 240,000. Durable goods came in at 6.5%, and the 10-year US Treasury Note yield rose to nearly 2.32%.

With no real surprises from the Federal Reserve yesterday, it was pretty much a given that they would leave rates unchanged and indicate they would start unwinding their $4.5 trillion balance sheet in the near future. Most traders feel that the “near future” will be the next FOMC meeting in September. A quarter point rate hike at the December meeting is still possible, with futures markets giving it a 47% chance.

It’s the unwinding that the traders will be most focused on in the future. At first, the Fed will reduce its $4.5 trillion portfolio by $10 billion per month, and gradually increase that amount to $50 Billion per month within a year. They hope to bring the balance sheet down to the $2.5 trillion to $3 trillion level. This is still significantly higher than the $1 trillion pre-financial crisis level. In the past, markets have reacted adversely when the stimulus has been taken away. However, this time, markets, banks and the overall economy (at least for the present) are much stronger than in the past.

In the meantime, enjoy this nice summer rally, and don’t forget to move those protective stop orders up to lock in any profits.