Why do stock bulls stand still with their arms crossed?

news7f12/08/2022

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Why do stock bulls stand still with their arms crossed?

This article first appeared in Morning Brief. Get the Morning Summary delivered directly to your inbox Monday through Friday by 6:30 a.m. ET. Ordered

Thursday, December 8, 2022

Today’s news is from Jared Blikre, a market-focused reporter 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 Risky rally fueled by Powell took the S&P 500 above its 200-day moving average for the first time since April, which has now been completely reversed and then some.

What was a reverse breakout is now a failure reverse breakout. A falling moving average that is ready to be rejected becomes a falling moving average that needs to be respected.

This, along with S&P 500’s five consecutive days of declinenow reset expectations about what Santa may or may not offer at the end of the year.

Sometimes in trading, patterns become apparent with hindsight — patterns that inform a series of trades should have almost perfectly mirrored and predicted price action over a period of time. .

Along these lines, the CBOE Volatility Index – aka VIX – has provided an excellent route to trading major indices in 2022.

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

S&P 500 Volatility Index vs CBOE — This year’s “easy” trade was only seen with hindsight.

And although the VIX tends to move in the opposite direction of the S&P 500, it is rare to see a clear mean reversal pattern unfold within an arbitrary time frame of a calendar year.

With the market moving from looking for a reason to move higher to one looking for a reason to stay range-bound, this emerging VIX-to-S&P relationship makes sense.

Of course, not everyone can (or will) predict by January 1, 2022 that this pattern will emerge. Or this relationship will appear at these specific levels. Sell at 20 and buy at 35 are retooled thresholds in the VIX. In life and in the market, hindsight remains clear.

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

However, with the latest “sell VIX” signal becoming a confirmed winner, you should be prepared for the next potential “buy VIX” signal that could emerge and think about how it plays out. around some key levels in the S&P 500.

The VIX’s rise back above 35 after a sell-off in the stock market is sure to attract the attention of traders and algorithms around the world. But there’s no way to predict where the S&P 500 will trade at that point or how long it will take to get there.

However, by a recent comparison, it took about six weeks for the VIX to move from 20 to 35 on the last swing — during the market sell-off that lasted from mid-August to early October — which gives see the potential to buy at the beginning of the new year.

Without any clear signal with the VIX, the S&P 500 could signal a bullish signal by simply retracing its 200-day moving average to the upside. This is likely (but not necessarily) on confluence with a simultaneous close above its negative 2022 trendline (red line in the first chart), which should strengthen the signal. .

The US dollar can also more clearbut it simply continued consolidating below the 200-day moving average after last week’s crash.

All in all, it’s like another waiting game for the S&P 500 bulls as the latest signal fades into the background. Next week’s inflation data and Fed meeting could shed some light on that. Or just add current market broadcast volume.

What to watch today

Economy

8:30 a.m. ET: Initial Unemployment Claimweek ending December 3 (230,000 expected, 225,000 last week)
8:30 a.m. ET: Request to continueweek ending November 26 (expected 1.618 million, 1.608 million last week)

income

Broadcom (AVGO), tough (CHWY), Ciena (FIRE), Wholesale Costco (PRICE), DocuSign (DOCUMENT), Domo (DOMO), Hello group (MOMO), lululemon athletics (LULU), national soft drink (FIZZ), RH (RH), Vail . Resort (MTN)