The S&P 500, the VIX, bank stocks, the dollar, and the EURUSD Points to Consider: The S&P 500’s 4-day ATR touched comparable 18-month lows this week, following the narrowest daily trading range since December 2019. The main concern this week is liquidity, as the end of structural volatility clashes with expectations for July, as well as pre-NFP and holiday trade in the US. The EURUSD finds the most concentrated event risk, despite its trend development eligibility being as limited as any other significant asset. Tuesday The disparity between levels and activity is becoming increasingly pronounced. To begin the new trading week, the markets have turned down the excitement while bolstering the positive signaling. It will be difficult to shake the market out of its controlled mood – but direction doesn’t seem to matter as much when day-to-day activity is this low. The importance of liquidity in our trading landscape is demonstrated by the activity levels of benchmarks such as the S&P 500, which demonstrate just how powerful this backdrop condition can be. The most widely traded and important benchmark for derivatives in the financial system in the United States climbed to a new high for the third time in a row. The 4-day ATR – a measure of realized volatility -, on the other hand, fell to its lowest level since December 2019. The medium-term activity indicator (20-day ATR) is also at historically low levels. Volatility is mean reverting, but it will be difficult to break this trend this week. That isn’t to say the market isn’t alive and well. The Nasdaq 100, for example, gained 1.3 percent as a concentrated appetite for momentum arose among desperate ‘buy the drop’ bulls. S&P 500 chart with 20 and 100-day moving averages and 4 and 20-day ATRs (Daily) Tradingview platform was used to create this chart. We are in the waning stages of a robust 15-month rebound, drawing back to preserve a full grasp of our financial condition. The neck-break pace of growth becomes more unsustainable to sustain without larger possibility for return in either favorable yield forecasts (hard to do without higher cost) and/or capability for prolonged economic expansion. This week’s dramatic drop in activity ahead of the NFPs and the US holiday weekend could very well be the lowest point in systemic lethargy. If it doesn’t happen, we’re in for a very quiet summer. Volume has been considerably low relative to the first bounce last year on a weekly chart for the SPDR S&P 500 ETF, which many individual investors hold as a reflection of ‘the market.’ Nonetheless, the popular asset’s 20-week average turnover is comfortably above pre-pandemic lows. On the other side, volatility in this time frame is reverting to levels seen in December 2019 and January 2020. If the upward trend continues, these activity indicators will most likely continue to fall until the market is shaken. If, on the other hand, we defy expectations and the market begins to fall despite the season, expect volatility and volume to increase. On the Tradingview Platform, a chart of SPDR S&P 500 ETF with volume, 20-Week Volume Avg, and 20-Week ATR (Weekly) was created. After Distribution News, Bank Tickers Gain a Broader Risk Appetite. The Litmus Exam I’m keeping a seasoned vigilance over headlines that are viewed as a bearing for global monetary policy – a basic building component of optimism over the previous decade – for fundamental themes that can scale up to the wholesale ‘risk’ danger level. The Fed, on the other hand, appears to represent the sentiment of the entire market at the moment, and the group is content to let the market quietly digest the implications of their forward-shifted rate predictions from the FOMC’s SEP and words that warm up the likelihood of a taper in the near future. Another topic I’ve been following is the reaction to big US banks’ intentions to disperse earnings to shareholders after all 23 of the central bank’s monitored institutions passed stress tests with flying colors. Following Monday’s closing, banks began to disclose their plans to distribute capital. Morgan Stanley’s stock surged 2.5 percent after hours after the company announced it would double its dividend to $0.70 per share and engage in a $12 billion share buyback program. However, it appeared that this was the limit of the initial enthusiasm. After hours, certain businesses, such as JPMorgan and Citi, were trading down as it appeared that the statements were not precise enough or fell short of expectations. Huge buybacks in the banking industry or among large IT businesses helped bolster an already-mature market in prior years. It’s possible that optimism will rise on Tuesday’s open, but for now, the market appears to be slowing down. WCF, GS, BAC, MS, JPM, and C (Daily)Chart Created using Tradingview Platform Year-to-Date Performance Chart The Dollar has the highest latent potential, while the EURUSD has the highest event risk. Thankfully, as we enter Tuesday trade, the economic calendar will perk up significantly and carry us through at least a couple notable reports until Friday’s NFPs. However, there is no guarantee that this active calendar would result in a significant increase in market volatility. The Dollar, if anything, remains a flashpoint for event-driven volatility. Thematically, it has shown a more tangible reactivity to recent adjustments in rate estimates for the US, but bulls are still irritated by the lack of traction following the PCE deflator this week. This has dampened my hopes for Fed-speak this week (Rosengren, Williams, and Quarles’ remarks in the previous session did not stoke the fire), but data may have a better chance because it lacks the inbuilt regulator that keeps markets calm. The Conference Board’s consumer confidence poll for the current month is up next, and it might provide insight into spending expectations and inflation estimates. DXY Chart with Implied Fed Hikes Through December 22nd and 5-Day Range (Daily) Tradingview platform was used to create this chart. Taking it a step further, EURUSD is the best Dollar pairing for today’s possible volatility, just based on the depth of substantial event risk expected for release. The Eurozone is set to issue June economic, consumer, and industrial confidence figures to complement the US data. Furthermore, Germany’s initial June consumer inflation report (CPI) will be released, as will the Euro-consumer area’s inflation expectations data. With an economy that lags behind the US recovery due to the delayed epidemic reopening, the ECB is thought to be firmly in the dovish stance, but that perception may easily alter due to this event risk. In addition, the technical backdrop is more conducive to volatility. Only a handful of equally constrained periods (all indicated in the chart below) dating back in the 16 months since the epidemic first struck have been equivalent to EURUSD’s recent 4-day range. Short-term volatility is beneficial for breaking out of a narrow price band, but the bigger technical boundaries around the pair – which can attract more range appeal among traders – will be obvious. Chart of the EURUSD with 100 and 200-Day Moving Averages and 4-Day Historical Range (Daily)Chart on Tradingview Platform.
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