Let's talk about volatility, because that's what everyone else is talking about. The Volatility Index is under 17 (barely) and it has folks concerned. It should. Because the VIX hasn't traded this low since the calendar turned to 2022. That's a long time.
But it's not just stocks. I read in the Wall Street Journal that bond volatility is back to where it was before Silicon Valley Bank imploded in early March. I saw that oil volatility is at an 18th month low. And currency volatility is at its lowest in a year.
That always begs the question, should we go with the old Wall Street adage that we should never short a dull market or should we be suspicious of a market that has not had volatility this low in more than a year?
I go back to the Daily Sentiment Index (DSI) for the VIX. It currently resides at 18. As a reminder, between 15 and 20 we are "on the lookout" for a change; between 10 and 15 we are in the yellow zone and once into single digits we are in the red zone.
Recall the Daily Sentiment Index for bonds never got over 90 on that recent move lower in rates, but it did get to 83 -- so it only got to the pre-yellow zone -- and now look what has happened to bonds/interest rates. So we don't need to get to single digits to have volatility rise, but those are the parameters I look for.
I also like to pay attention to the indicators. As discussed here yesterday, the intermediate-term indicators are not yet overbought, they are closer to getting there, but are not quite there yet. In addition, I like to see the breadth indicators roll over to confirm something has changed. For now, the McClellan Summation Index is still rising. It would require a net differential of -1,900 advancers minus decliners on the New York Stock Exchange to halt the rise and obviously more to roll it over.
Will it catch the exact high? Probably not but for me it is a good guide.
If you take a look at the February high you can see that the S&P made its high on the first of the month and while it appears the Summation Index rolled right over, in fact it took until the second week of February to do so.
Speaking of bonds, the recession fears seem to have subsided since interest rates on the 10-year Treasury have risen from 3.3% to 3.6% in the last two weeks.
I think there is some resistance here in the 3.6%-3.7% area. I can see a back off from here and another try higher on rates. Maybe by early May we'll be back to folks fretting over higher rates just as the intermediate-term indicators are getting back to an overbought condition.
