Key Tactical Takeaways:
> So far, there just isn't enough fear in the market to force the VIX to close above the first downside stop at ...For, > 1-sigma daily ranges to become the norm, we need to see the VIX close above the ... stop.
> Several key market segments covered here, where EFA, QQQ, SPY, FXY and XLF act as proxies, have fallen so far, so fast in recent days that reversion back to the short-term mean is in play this morning. Despite this, additional downside risk prevails over the NT.
> Although the momentum behind this month's 1st half rotation into risk averse sectors/away from risky sectors may have peaked, there's nothing to suggest that this trend of overweighting risk averse sectors can't continue over the near-term.
> Be sure to visit the Event-Driven Stats page (pg. 8) for an important history lesson.
Some Quick Thoughts:
If we all stop trying to overthink why it is that some negative news cycles have more of an effect on the market than others, we'll all sleep a little better at night. To us, it's as simple as knowing where you are in the price cycle. For instance, this past week-end's headlines regarding international banks’ failure to limit money laundering, the growing Covid-19 concerns across Europe, and speculation on how a SCOTUS nomination might impact US Senate and presidential races probably would have resulted in a minor market blip had they occurred during the euphoric rally of late-Jul/mid-Aug. Instead, they helped initiate Monday’s early swoon at a time when the benchmark S&P was vulnerable to a 3rd wave of selling from the September highs, during the weakest seasonal period of the year (mid-Sep to mid-Oct).
Key global equity index futures like the DAX and S&P (Japan is on holiday) are higher this morning. However, we would caution that, in the absence of any meaningful headlines overnight, this is simply the computers reacting to the anomalous downside price displacement that occurred below very short-term averages on Monday. While we still view this decline as a setup for the next important buying opportunity, the fact that S&P cash and EURJPY still have measured potential down to ... and ..., respectively, has us on the lookout for another leg of selling in the next 24 - 48 hours. This will remain the case pending a close above the S&P's short-term trailing stop at ...
Ahead of this week's supply of 5-Yr and 7-Yr Treasuries, we remain focused on the fact that longer-dated Treasuries have not attracted meaningful risk-off flows during the recent equity swoon. While Monday's near-term trend breakdown in the financials sector does not help our view that benchmark yields should remain stable-to-higher over the near-term, the fact that the financials vs. utilities ratio remains steady is supportive of this view.
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