Volatility Begins to Return

 | May 16, 2018 | 6:00 AM EDT
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Volatility had quite a rise on Tuesday. And it arrived right on schedule -- mid May. There is some 'resistance' at 15 on the VIX but I am still in the camp that says we'll see more volatility in mid-May even if it backs off some from here.

The indicators from Tuesday's decline didn't tell us much. For example, breadth was about in line, perhaps a touch better than the decline in the S&P 500 implied but relative to the fact that the Russell 2000 ended the day exactly unchanged, breadth was poor. Thus there is no takeaway from breadth except to note that two days ago the McClellan Summation Index needed a net differential of -2100 advancers minus decliners to roll over and as of today it only requires -500. This is why I say weak breadth rolls the indicators over and that's why I fuss so much about it.

In terms of sentiment, the Investors Intelligence Bulls surprised me by notching up only 3 points to 46.6%. I thought for sure we'd see them over 50% this week. Put that in the positive column for now. Sticking with sentiment, the total put/call ratio ended the day at 111%, the highest reading since May 1st. Recall just a few short days ago the equity put/call ratio was at 51% so there was a concern that crept into markets Tuesday.

The bearish side of the ledger saw the number of stocks making new lows expand greatly. The NYSE saw 100 new lows which is the most since we were near the lows and the S&P was 100 points lower than it is now. Expanding new lows, if they continue, are negative for the market.

But what I really want to discuss today is the Daily Sentiment Index (DSI). I have noted here several times that when we see single digit readings (or conversely readings over 90) we are extreme. Monday we saw the VIX at 9 and Tuesday the VIX jumped almost two points. The DSI is now at 20. That means it is no longer extreme.

Yesterday I explained how the euro had gotten under 10 last week and we saw a bounce in it. Tuesday's move has it back at 10. In fact, there are now so many instruments with readings 'on the verge'. There is the aforementioned euro. But the flipside is the Dollar Index is now at 91. I expect to see the euro bounce within the next few days, especially if Wednesday sees the DSI slip back under 10.

Gold is at 10, as is silver. That makes them both worth paying attention to in the next few days, especially if their DSI's slip under 10.

Then there are bonds. I have found that the extreme for bonds tends to be under 20. Both Treasury Notes and Bonds ended the day at 20. I would remind you that a few weeks ago I did a calculation on the yield on the Ten Year and I came up with 3.10-3.15%. The close on Tuesday was 3.07%.

So there is a lot to pay attention to in the days ahead as we're starting to see some extremes creep into many instruments.

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