Key Tactical Takeaways:
> History suggests that we should be adding long volatility exposure to our portfolios this week, in anticipation of a higher VIX trend leading up to the week of the election.
> S&P 500 cash's reflexive rebound has run into a formidable wall of resistance in the ... area that leaves near-term risk leaning ... ahead of tonight's first presidential debate.
> Meaningful deterioration in German bund yields and the risk of increased risk-off flows in the coming days are items that may test the resolve of the US 10-Yr yield's bearish (price) NT Trailing Stop that is close to being tested at ....
> Many of the risk proxies showcased on this report's Top ETFs pages have reversed their ST downtrends and are about to test bearish NT stops. IF these stops are overtaken, the next seasonal down-leg would be delayed a couple of weeks.
Some Quick Thoughts:
In a time of so much uncertainty, the market is certain that it hates uncertainty. Therefore, as we enter the final stretch ahead of the presidential election, where tonight’s first debate is sure to showcase how the dirty game of politics can stir up even more uncertainty, history suggests that we should be adding long volatility exposure to our portfolios.
In this weekend's Weekend Macro Press, we highlighted the fact that the 4-Yr Z-score of net commercial positions as a % of open interest - net large speculator positions as a % of open interest has been building to levels that typically precede periods of stable-to-higher price movement in the VIX. This positioning by "smart money" accounts, whose net positions typically build to extremes ahead of meaningful trend turning points, makes sense when we consider what the VIX tends to do in the final stretch leading up to the presidential election.
Specifically, the Event-Driven Stats page of this report (pg. 8) highlights VIX returns both during the 6 - 7 weeks leading up to the election and during the 3 - 4 weeks following the election. Although there were two instances (2004 & 2012) where the VIX closed lower to end of the week of the 1st presidential debate, it closed higher in weeks 2 - 5 leading up to the election in every instance. On average, even when the 2008 outlier is removed, the VIX trended higher and did not peak until the week of the election, before relative calm was restored and volatility began to contract again.
For the benchmark S&P 500, the fact that cash trading closed right at the bearish NT Trailing Stop of ... on Monday confirms that the prevailing energy from September's highs still leans bearishly. IF this stop is overtaken, the next seasonal down-leg would be delayed a couple of weeks. Until this occurs, however, near-term trend follows should maintain core bearish positions in assets correlated to the S&P 500.
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