Why stock bulls are sitting on their hands again

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Thursday, December 8, 2022

Today’s newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared. Read this and more market news on the go with Yahoo Finance App.

What a difference a week makes.

Last Wednesday’s Powell-fueled risk rally that landed the S&P 500 on top of its 200-day moving average for the first time since April has now been fully reversed and then some.

What was an upside breakout is now a failed upside breakout. A declining moving average ready to be rejected has again become a declining moving average that must be respected.

This, along with five straight days of declines in the S&P 500, now resets expectations about what Santa may or not deliver into year-end.

Sometimes in trading, patterns become obvious with hindsight — patterns that inform a host of woulda-coulda-shoulda trades which nearly perfectly reflect and predict price action over a period of time.

Along these lines, the CBOE Volatility Index — a/k/a the VIX — has provided a beautiful roadmap for trading the major indices in 2022.

A simple system emerges: buy the the S&P 500 when the VIX surges above the 35 level — indicating a relative amount of fear — and sell the S&P 500 when the VIX dips below 20, indicating relative complacency among investors.

S&P 500 vs. CBOE Volatility Index

This year’s “easy” trade seen only with hindsight.

And though the VIX tends to move inversely with the direction of the S&P 500, it’s rare to see a mean-reverting pattern play out this cleanly over the arbitrary time frame of one calendar year.

In the context of a market that is shifting from one looking for excuses to move higher into a market looking for reasons to remain range-bound, this emerging VIX-to-S&P relationship makes sense.

Of course, it’s not as though anyone could have (or would have) predicted on January 1, 2022 that this pattern would emerge. Or that this relationship would emerge at these particular levels. Sell at 20 and buy at 35 are retro-fitted thresholds in the VIX. In life and in markets, hindsight remains crystal clear.

CHICAGO, IL - JUNE 06: Traders work on the new floor of The Chicago Board Of Options Exchange on June 6, 2022 in Chicago, Illinois. The new trading floor officially opened at the beginning of trading today with upgraded technology and infrastructure. (Photo by Jim Vondruska/Getty Images)

Traders work on the new floor of The Chicago Board Of Options Exchange on June 6, 2022 in Chicago, Illinois. (Photo by Jim Vondruska/Getty Images)

Nevertheless, with the latest “VIX sell” signal becoming a confirmed winner, it makes sense to prepare for the next potential “VIX buy” signal that could emerge and think about how that plays out around some of the important levels in the S&P 500.

A surge in the VIX back above 35 after a bout of selling in the stock market would no doubt get the attention of traders and algos the world over. But there’s no way to predict where the S&P 500 would be trading at that point, or how long it will take to get there.

However, by way of recent comparison, it took about six weeks for the VIX to travel from 20 to 35 the last go-around — during the market sell-off that ran from mid-August to early October — which would point to a potential buy early in the new year.

Failing any signal clarity with the VIX, the S&P 500 could flash a bullish signal by simply reclaiming its 200-day moving average to the upside. This would likely (but not necessarily) occur in confluence with a simultaneous close over its 2022 negative trend line (the red line in the first chart), which would strengthen the signal.

The U.S. dollar could also add clarity, but it simply continues to consolidate under its 200-day moving average after last week’s breakdown.

All in all, it’s looking like another waiting game for S&P 500 bulls as the latest signal melts into noise. Next week’s inflation reads and Fed meeting might clear that up. Or just add volume to the current market broadcast.

What to Watch Today

Economy

  • 8:30 a.m. ET: Initial Jobless Claims, week ended Dec. 3 (230,000 expected, 225,000 during prior week)

  • 8:30 a.m. ET: Continuing Claims, week ended Nov. 26 (1.618 million expected, 1.608 million during prior week)

Earnings

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Source: https://finance.yahoo.com/news/why-stock-bulls-are-sitting-on-their-hands-again-morning-brief-102040777.html