It’s nice to see that traders have pushed equities higher as some of the major indices approach their prior highs. However, this has caused volatility to get back under 14 and the level of compression within the VIX has hit a level that gives me pause.
Volatility of volatility (as measured by VVIX) has fallen back to a level that, for the last year and half has marked several low points for the VIX.
This, along with several other indicators that I closely monitor, has me watching volatility right now. While we head into a long holiday weekend, Jason Goepfert of SentimenTrader notes that since 2010, seasonality after Memorial Day hasn’t been extremely bullish for stocks:
“Since 2010, the week of the holiday (next week) was positive only once (+1.2% in 2014). The other five years averaged a loss of 1.9%. None of the six years saw the S&P rally any more than 1.5% at its best point during the week.”
Not that markets must follow their past playbook, but this negative slant of seasonality paired with what I’m seeing in volatility markets could play out in the bears' favor in the coming weeks with a pop in the VIX. We’ll see what happens.
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