As we start the new quarter with the overriding question of whether the risk rally has legs, or is this the time to review renewed bearish exposure – here are a few charts that are on my radar:
S&P500 daily % ranges – We closed the S&P500 cash session -1.6%, with the index tracking a 2.7% range (or 70-points) – the bulls will like the recent reduction in the daily trading range, and today was the narrowest since 26 February.
That said, they won’t like the increased volume seen on a down day.
One interesting angle is that despite the narrower range, it hasn’t resonated as it should in the VIX index (30-day implied volatility of the S&P500), which has remained above 50%, closing at 53.5% and lower by 3.5 vols on the day.
We can equate that the VIX index at 53% implies a daily move of 3.6% (higher or lower) and a potential range of 7.2%.
Workings – (70/2 = 35)…((35/2626 prior S&P500 close) *15.9) = 20.6%
We use 15.9 as it is the square root of time – SQRT/252 trading days in a year
So, a 2.7% daily range equates to VIX index closer to 20%. We ask, is the options market correct in its expectations of a renewed pick up in range expansion?
We can trade this through the VIX futures – our price follows the front-month, as you can’t get direct exposure to the VIX cash index.
There is a fair value weighting between the cash VVIX and futures. A move through 50 in VIX cash, would resonate in the VIX futures and would state a move through the support zone where traders have been vol buyers.
A reduction in vol would be huge for risk markets, especially if we get back into 20%.
US500 (S&P500) – The S&P500 closed -1.6%, with futures down a further 1.2% in Asia. The set-up has resonated with traders, where once again the cash and futures index have rejected the 38.2 fibo of the Feb-March sell-off.
An upside break could still play out, where I would focus on taking long exposures on a closing break through the 38.2 fibo level of 2644 – this would likely be a trigger for a reduction in equity volatility.
That said, a close through the 5-day EMA looks more likely though, with 2469 being my key line in the sand and one where I will turn far more bearish again – Expect the vol buyers to be vindicated on a break here and talk of a re-test of the 23 March lows to pick up.
USDJPY – The Fed has opened swap lines to a range of global central banks, with the BoJ and ECB taking the lion share of $370b now transacted since launching the USD swap facility.
Overnight, we saw a new facility being introduced, offering foreign central banks the ability to swap their holdings of US Treasuries for USDs at a cost of 35bp. It seems this new facility will not be used that actively, but it shows a commitment to keep USD funding down, and we see USDJPY cross-currency basis swaps now at -5bp having been as wide as -153bp on 19 March.
A clear USD negative.
The best way to play this it seems is via USDJPY – On the four-hour chart, we see strong support into 107.38 – if this gives way, I will look at short positions here as a momentum play.