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: +4.5%
2025 S&P 500 Return: +5.2%
2025 Portfolio over/underperformance: -0.7%
The Bird’s Eye
View from ahigh
The June expiration cycle (futures and options) is now complete after last Monday’s quarterly options expiration (OpEx). Since this cycle started on June 18th when the June VIX futures contract expired, all we’ve seen is bullish action: the S&P and Nasdaq printing new highs, healthy mechanics taking hold in equity markets, markets shrugging off bad news, and VOL conditions continuing to improve (more on that in Volatility, Correlations, and Dispersion). This is what bull markets do, like it or not.
The big data prints last week were on Thursday: non-farm payrolls beat (147k vs. 111k estimated), the unemployment rate beat (4.1% vs. 4.3 estimated), and initial jobless claims beat (233k vs. 240k estimated). These strong numbers contradicted the weaker-than-expected ADP print on Wednesday. But stocks barely paused on Wednesday, and Thursday kept the party going.
As the July 4th sparklers burn out and we move into the first full week of the third quarter, we’ll find out if the bulls wore adequate sunscreen and stayed hydrated this weekend or if their Monday sunburns and hangovers give bears another shot at redemption.
The Market’s Mouth
Straight from the source
It took a while, but healthy rotational mechanics have returned to the equity markets, and that is good news for the bulls. So, what does this mean, exactly?
Before I go any further, tip of the cap to selling_theta for enlightening me on the importance of mechanics. He’s one of the only people I’ve ever seen or heard highlight the importance of mechanics.1 One could argue the lack of other advocates means mechanics don’t actually matter, but as the correlation between healthy mechanics and healthy VOL markets has become evident to me, I’ve been convinced they do.
Healthy market mechanics are usually easy to spot. When I mention these mechanics, I’m almost always referring to equity markets, and what I look for is rotation between and amongst various indexes, sectors, and even just large individual stocks.
Generally speaking, it’s a good thing when large cap stocks (think the Nasdaq) lead the market higher. It’s impossible for the Nasdaq to lead every day, so during sessions when it is weak, I am on the lookout for other indexes or sectors to take over leadership. Oftentimes, small caps (think the Russell 2000) and banks will lead together when the Nasdaq is having an off day, and other times it’s the Dow that steps up.
There are other times when all of the major indexes are red but one or more of the mega cap stocks or a few of the largest banks are green, and that’s all it takes to keep markets calm. In those instances, I’m often looking for those handful of individual stocks to keep the market steady for the first few hours of the session until broader buying comes in.
Issues can arise when we see everything move together, either up or down. It’s more obvious when everything is sold at once as that leads to correlations climbing, which can make VOLs jumpy. But there are also risks when everything rallies at the same time as that can indicate aggressive, chase like buying. This will sometimes be accompanied by measures of volatility, such as the VIX, also climbing, i.e. market up/vol up, which can be destabilizing. In both cases, I consider this a departure from healthy mechanics.
The beauty of a rotational market is VOLs are kept at ease. During any given session, the market can rotate away from danger and into whatever index, sector, or significant stock(s) is showing relative strength. These conditions are often accompanied by a healthy VOL complex where the VIX futures board is in contango, and any selling that triggers a jump in VOLs is easily absorbed. This provides the cover of time, which can help the market catch itself before resuming its march higher.
These dynamics were reestablished in the past few weeks, and it’s no surprise this is happening as the Nasdaq and S&P print new all-time highs with the VOL complex looking as healthy as it has in months. Until this changes, consider it a loud and clear message from the market: Onward and upward!
Under the Hood
Volatility, Correlations, & Dispersion
As mentioned above, the significant June expiration cycle is now behind us. But before we start to congratulate ourselves on making it through unscathed, it’s important to keep in mind that repositioning after last Monday’s quarterly OpEx may bleed into this coming week, possibly exposing some vulnerabilities. Additionally, VIX and VVIX both look like they’re not quite ready to break below their recent floors. For VIX, the 16 level has held firm, and for VVIX, getting much below the high-80s has been difficult.
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