Preamble
Welcome to my weekly market note where I explore what has my attention in markets and share all that’s happening in my trading systems. I am often looking for (and will highlight) notable shifts, extremes, and divergences that catch my eye. I’ve found these can be the whispers that precede the market making an overt statement.
There’s a glossary at the bottom of the note that clarifies some of my terminology. I also host chats about each market note and trade updates in which paid subscribers can follow up with questions and comments. Use the link below to join those chats.
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Lastly, please read the Disclaimer at the bottom of this note. It’s important.
With that said, let’s get after it…
Performance Snapshot
More details are provided in the K.I.S.S. section
2025 Portfolio P&L: +8.4%
2025 S&P 500 Return: -0.2%
Portfolio over/underperformance: +8.6%
The Bird’s Eye
View from ahigh
The “risk on” signals I mapped out in last week’s market note proved their worth this week as equities shot out of the gate on the Monday open and barely looked back straight through to the Friday close. On Friday, May 9th, VIX closed at just under 22. By the Monday open, it was 2 vol points lower and dropped by another 2.5+ vol points by Friday. The VIX futures curve dropped and steepened during that Friday-to-Friday window (see image below) adding more structural downward pressure on VOLs and increasing overall market resilience.
The rest of the week saw cool CPI and PPI prints, a Saudi chip deal, jobless claims inline with expectations, weak bonds (more on that later), better-than-expected retail and manufacturing data, a nothing burger Powell speech, and some excitement after the Friday bell when Moody’s downgraded the U.S. long-term credit rating a few hours after Congress failed to pass Trump’s tax bill. Coupled with Friday’s call-heavy monthly options expiration (OpEx) and this coming Wednesday’s VIX expiration, the Friday-to-Sunday news flow could make Monday interesting. Bulls are very much in control but there’s a window here in which bears have a shot to reassert themselves.
The Market’s Mouth
Straight from the source
Stocks and bonds have had an interesting relationship since Liberation Day. There were sessions when they moved in the same direction and other sessions when they diverged. When they’ve both sold off, the narrative has been, “This is a complete rejection of the United States.” When they’ve rallied together, it was the opposite. At the same time, you could argue that stocks up/bonds down (and vice versa) is what you’d want to see in a “diversified” portfolio. However, these days, stocks up/bonds down is raising concerns because of the “bonds down” side of the equation.
The interest rate on the 10-Year Note, as illustrated by the ticker TNX, indicates that the high this week (~4.54%) got within striking distance of the high from the post-Liberation Day panic (~4.59%) when markets were on the verge of imploding. That was on April 11th. Since then, the S&P has climbed nearly 600 points.
How could this be?!? We could all see the end of the world approaching the last time the 10-Year rate was nearing 4.6%, yet now we have newsletter writers claiming we’re back to “risk on” even as rates are back to those highs.
In early April it was a lack of liquidity that was blamed for the bond routing amidst fears of the financial system imploding, but now one could argue the bond selling is because the market believes the economy is strong and primed to grow. What a swing! I’ve heard others say that equities are oblivious to or are ignoring the risk of rising interest rates and will come to regret their nonchalantness.
Getting to my point, the only thing that matters is what the market is saying, and right now the market is telling us that it is not worried about interest rates (no, equities are not oblivious to what’s happening in rates markets). I don’t know why nor do I really care to try to find out. Is there a level where stocks do start to care? Maybe. Probably. Do I (or anyone else) know what that level is? Nope. But the good thing is the market will tell us if it’s unhappy or uncomfortable, and then we can take action if we need to. Until then, it’s best we observe objectively and listen to what we’re being told.
Under the Hood
Volatility, Correlations, & Dispersion
The VIX futures board closing in slight contango on Friday, May 9th proved to be prescient. Even though the front month contract dropping below the second month contract was an isolated event, there were weeks of incremental improvements
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