Nowhere, Man

Earlier this month we noted how the Cboe Volatility Index (VIX) was at levels not seen since just before major turning points in the broad indices.  Bearing in mind that VIX is structured as a method for determining the market’s best estimate of volatility over the coming days, it has so far been doing a good job of anticipating the general stasis that we have seen throughout April.  As I write this, around midday on the last day of the month, the S&P 500 Index (SPX) has spent the entire month within a 3% range; the NASDAQ 100 (NDX), which is typically more volatile, has been within a 4% range.

4 Week Chart, SPX (red/green 20-minute bars), NDX (blue line)

Source: Interactive Brokers

The second half of the month, which admittedly brought more volatility than the first (though not by much) had the potential for some fireworks.  We began earnings season in earnest on the 14^th, when JPMorgan and some of its peers reported.   There were few surprises in those results, but the larger concerns in the banking sector were housed in the regional banking sector, not the “too big to fail” cadre.  Yet for the most part, there were few fresh concerns amidst those banks as well.  The one glaring exception is First Republic (FRC), which is plunging once again, but this time the market is viewing potential troubles in a single bank as an isolated event, not a cause for contagion.

Another cause for concern was that the narrow leadership of this year’s rally could have an undue negative influence on broad markets if those stocks stumbled.  But for the most part, they haven’t stumbled, and more have thrived.  Tesla (TSLA) was the first megacap tech to report, and that stock plunged.  Since then, we have gotten huge beats from Microsoft (MSFT) and Meta Platforms (META), and a decent report from Alphabet (GOOG, GOOGL).  Yesterday, Amazon’s (AMZN) results beat estimates but offered poor guidance, disappointing bullish options traders but not falling sufficiently to upset the market’s recent rally.

Another top-10 stock in NDX with a positive result was PepsiCo (PEP).  We noted that a hallmark of this earnings season has been the ability of consumer stocks to pass along higher prices to their customers without penalty.  The consumer remains stalwart, if not outright confident, which certainly provides a boost to the economy.

The rally of the past two days has caused VIX to sink to its lowest levels since November 2021.  We even saw a 15 handle briefly today.  For perspective, November 2021 was the peak in NDX, about 27% above current levels.  (SPX peaked in early January 2022). 

4 Week Chart, SPX (red/green 20-minute bars)

Source: Interactive Brokers

Can this relative complacency continue?  If past is prologue, then sure.  We’ve been in a tight range and it’s normal for people to have a recency bias.  That means that recent events weigh more heavily in people’s decision making.  We’ve been quiet, so it’s normal for traders to extrapolate that calm into their pricing. 

Might the coming week’s FOMC meeting and/or Apple (AAPL) earnings upset that calm?  Sure, especially if traders have extrapolated the positive results from other megacaps onto AAPL and if the Fed gives no indication that the 2-3 anticipated rate cuts are nowhere on the horizon.  Can we continue to largely ignore the drama surrounding the debt ceiling?  Of course.  We have another month or two before the crisis becomes acute, so it is not unreasonable to think that the worst outcomes can be avoided at the last minute.  Is the market correct in looking at all these events through rose-colored lenses?  I’ll leave that for the readers to decide.