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VIX Volatility Appetite Rises But Nasdaq and EURUSD Likely to Wait Until Friday

VIX Volatility Appetite Rises But Nasdaq and EURUSD Likely to Wait Until Friday

John Kicklighter, Chief Strategist

Nasdaq 100, Oil, VIX, VXX and EURURSD Talking Points

  • Similar to the previous day’s tempo, the US indices were edging new highs, but they would again do so on one of the most reserved trading sessions in years – as with the Nasdaq 100
  • Anticipation is high for impending volatility as seen on volume behind the VXX short-term VIX ETF, but clarity on Taper speculation is likely to hold until Friday
  • EURUSD is in a strong position for a technical break from a dwindling range, but the Jackson Hole Symposium is likely to hold its charge until key event risk on the final day of trade
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The Speculative Well Tapped, Now Is the Time for Fresh Inspiration

Market participants are eagerly awaiting the next speculative motivation to extend mature trends and accelerated reversals…or to otherwise reverse these loaded technical bearings. There is considerable anticipation for what can materialize out of the upcoming session’s fundamental docket, and those expectations may not prove exactly practicable, Jackson Hole Symposium start or not. Taking stock of the market’s need for serious fundamental backing, I will once again note the stretched position of the pace-setting US equity indices. Both the broad S&P 500 and trader-favorite Nasdaq 100 put in for fresh record highs this past session, but they do so on the most lackluster of tempos. Once again, the technical picture on the day from Wednesday is wholly unpersuasive of bullish intent. The tech-heavy index carved out an even smaller daily range this past session than the extremely controlled spans the previous. The smallest stretch of daily price action (as a percentage of spot) since June 30th – and before that, not seen since December 2019 – signals a market fragile to what comes next.

Chart of the QQQ Nasdaq 100 with Volume, 50 and 100-Day SMAs and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

While a different technical layout, there are also the speculatively inclined markets that were pressed even more aggressively into a fast-tracked recovery pattern. A correction of a more ambitious reversal generally aligns to a reversal back into range which follows the path of least resistance. It is generally easy to cover more ground in such scenarios, but not necessarily when the trading interests behind the move are genuinely concerned about what happens after liquidity is fully restored and matters such as a leveled out economic recovery start to earnestly show through. As such, the rebounds seen from the likes of US crude oil have materially flagged. WTI actually extended its rebound to a third consecutive trading day which has officially pushed us back above the 100-day moving average around 67.90, but that hasn’t sustained tempo and volume. For other, similar corrections such as that from USDCAD, emerging markets and other markets; the extension is even less impressive.

Chart of US Crude Oil with 50, 100 and 200-Day SMAs with 3-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

The Weight of Anticipation

There are two competing forces at work and find ourselves somewhat at a crossroads. On the one hand, we have the practical expectations of a seasonal curb on participation that is further well-rooted in the recognition of a stretched backdrop for sentiment. On the other, there is the persistence of hope – hope that scheduled or unscheduled event risk can break from norms and provide more active markets. As a practical measure, traditional measures of expected volatility remain extremely temperate. The VIX volatility index further extended its retreat from last week’s peak and is now below the 17 handle. While it would seem that the once-popular (it is far less renowned in this age of Robinhood accounts) VXX short-term volatility ETF is similarly put out to pasture as it hovers just above record lows, note the activity behind the produce. Volume trends behind VXX have steadily advanced suggesting the restless traders anticipation a jolt may soon come along.

Chart of VXX Short-Term Volatility ETF with 100-Day SMA and Volume (Daily)

Chart Created on Tradingview Platform

While speculative interests have a tendency to misprice scenarios in favor of the impractical when it would seem to present an opportunity that could offer a serious market movement, I believe there is good reason to suspect a reversal in volatility is not far away. That said, there is a very different series of probabilities for this shift when considering this week, next week and the opening of September. After the US Labor Day holiday (September 6th), I believe it is likely that a restoration of liquidity will start to combine with prominent fundamental issues that threaten stability for assets at record highs. However, the picture for this week is a very different scenario. The potential rests with particular event risk in the Jackson Hole Symposium and its reference to monetary policy intent. If we don’t find a trigger for greater tumult this week, it seems far less likely to me that it will develop next week, even with event risk like the NFPs.

Chart of S&P 500’s Performance, Volume and Volatility via VIX Per Calendar Month

Chart Created by John Kicklighter with Data from Bloomberg

Expectations for Jackson Hole

While there is other fundamental risk on offer for this coming session, attention no doubt rests heavily on the start of the Jackson Hole Symposium. This economic summit of central bankers, finance minister and other important market participants taps into one of the most important support structures of our current fundamental position. Stimulus has played a critical role in fostering the economic recovery from the pandemic and well before that Great Financial Crisis, but it has done even more for capital markets. Moral hazard is an entire industry for policy makers whether they intended it to be or not. There is no doubt recognition of this exposure by Fed and peers which has in turn led to delay with addressing. However, it seems we are coming towards the end of the maneuvers to avoid reconciliation. Hence the focus around the Fed’s critical taper move. Whether or not the central bank makes clear its intentions this week or waits for the September 22nd rate decision and SEP is a legitimate open question. That said, a decisive view on Thursday seems far less likely. While the Symposium starts today officially, the agenda isn’t due to come out Thursday night local time. It seems this first day is an acclimation day with the meaty insights not due until Friday – we at least know that Fed Chairman Powell’s speech is due at 14:00 GMT on Friday.

Chart of Perceived Monetary Policy Standing of Major Central Banks (Daily)

Chart Created by John Kicklighter

It’s possible that there are important comments to draw from a policymaker from ‘the sidelines’ but given this year’s Symposium is again a virtual event and the FOMC has made a very clear effort to control its message for fear of forcing a collapse in volatility, a drive spurred by an inadvertent leak seems improbable. It may be the case that the markets are so anxious for insight, that a spark causes a speculative run. However, the follow through on such an effort would dry up quickly with the expected follow up from Friday. As such, I will be watching technical patterns like EURUSD which are still in a good position for a nudge to clear tight congestion, but my register for follow through will await fundamental and market conditional consent.

Chart of EURUSD with 50-Day SMA, 50-Day Disparity Index and 20-Day ATR (Daily)

Chart Created on Tradingview Platform

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