{"id":205103,"date":"2024-04-17T11:15:00","date_gmt":"2024-04-17T15:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=205103"},"modified":"2024-04-25T12:03:21","modified_gmt":"2024-04-25T16:03:21","slug":"so-it-seems-like-i-missed-something","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/options\/so-it-seems-like-i-missed-something\/","title":{"rendered":"So, It Seems Like I Missed Something\u00a0\u00a0"},"content":{"rendered":"\n

I\u2019ve often joked that I really should make it a point to buy VIX calls before I go on vacation because the stock market tends to have a bout of volatility when I\u2019m away.  I didn\u2019t go far (Mexico City) and I didn\u2019t go for long (six calendar, four trading days) but I ended up getting a series of phone calls and alerts about the recent swoon in global equity markets.  I wish I\u2019d bought those calls rather than attempting to unplug.  VIX closed at 15.80 when I left and is at 18.59 as I type this. <\/p>\n\n\n\n

While the current swoon can be attributed to the geopolitical tensions in the Middle East, we did raise several notes of caution in recent days.  On April 4th<\/sup> we pointed out<\/a> the positive technical trends in oil and offered an early trading lesson that I learned:<\/p>\n\n\n\n

become concerned if oil stocks lead the market because it indicates that inflationary pressures are taking root.<\/em><\/p>\n\n\n\n

Four days later, we questioned<\/a> whether the stock market\u2019s ability to rise along with bond yields was indeed sustainable.  At that time, just over a week ago, 10-year Treasury yields had risen to 4.42% from 3.88% at the start of the year.  Meanwhile, 2-year Treasury yields had risen from 4.25% to 4.79% over that time span, even as the S&P 500 (SPX) rose 9%.  Since then, SPX is down just over -3%, but rates have increased even further.  They are currently at 4.61% and 4.93% respectively, both down about 6 basis points today.  We can attribute the most recent leg up in rates to a poorly received CPI report on April 10th<\/sup>, but it is quite clear that bond traders have turned even more negative than before. <\/p>\n\n\n\n

Rates have certainly followed the ebbing expectations for Federal Reserve rate cuts, but it is fascinating to see that rates did not benefit from a \u201cflight to safety\u201d trade.  When crises occur, it is typical for investors to seek safer assets, like US Treasuries.  But as noted above, rates actually rose<\/u><\/strong> as global tensions increased.  Some of that could of course be attributed to the fact that tensions involving Iran boost oil prices, which in turn boost inflation fears.  But none of it is friendly for equity investors.  As we cautioned at the time<\/a>:<\/p>\n\n\n\n

The problem of course is determining when equity investors begin to pay attention to rising bond yields.  What we saw last year was that they only did so once stocks began to move sideways during the July-August period.  The year\u2019s early momentum was broken, leaving stocks susceptible when yields spiked higher.  So far this month, we\u2019ve seen stocks\u2019 advance pause, but it is far too soon to say that the uptrend has lost steam, let alone be broken.  That could occur later this month, during earnings season, or next, if \u201csell in May and go away\u201d takes hold.  Or not.  It\u2019s not a hard and fast relationship.  But when stocks eventually take a sustained break from rising on a daily basis \u2013 it\u2019s hard to imagine they won\u2019t, unless you expect a 40% rise in SPX this year \u2013 it is difficult to assume that equity investors will continue to ignore rising bond yields.  I can\u2019t say when, or even IF stocks will take notice of rising yields.  But it would be foolhardy to ignore the likelihood that they could.<\/em><\/p>\n\n\n\n

It’s fine to do some backward-looking analysis, but it is more important to look ahead.  Indeed, SPX is down about -4% so far this month and trading at levels last seen in mid-February, but it is still up over 5% year-to-date and about 20% since the end of October.  By any standards, this is so far a modest pullback amidst some phenomenal gains.  To that end, we re-offer the points we made<\/a> and strategies we proposed as the new month and quarter began:<\/p>\n\n\n\n

To answer the basic question: sure, the momentum can indeed continue?  Paraphrasing Newton\u2019s First Law, \u201cmarkets in motion tend to stay in motion until acted upon by an external force.\u201d  <\/em><\/p>\n\n\n\n

But we can\u2019t assume that markets will remain essentially impervious to external forces indefinitely.  What might those external forces be?<\/em><\/p>\n\n\n\n