Santoli: The volatility of the market’s ‘fear gauge’ is down, sparking some concern on Wall Street

Published Wed, Jun 8 20221:19 PM EDTUpdated Wed, Jun 8 20222:22 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The indexes are lolling around a narrow range, with low volumes and high anticipation of Friday's consumer price index data. Entering today, the S & P 500 in two days had gained back last week's modest dip, leaving it almost 9% above the May 20 low but still shy of where skeptical traders would grant that this is more than brief relief rally in a nasty downtrend. Still think there's enough skepticism as fuel to make it a more heated debate over whether this rally is believable, but that remains to be seen. The index in a way is fighting to get back up into the year-long trading range above 4,200. The key widely watched hurdles are the 50-day average around 4,225 and the 4,300 threshold that capped rally attempts in late April/early May. By one angle, the market is doing a fair job absorbing the pressure from 3%+ 10-year Treasury yields and the relentless bid in oil and gas, which continue to show likely persistent strength in their forward futures pricing — a major challenge for central banks targeting headline inflation. Energy is getting pretty stretched as a sector, but in the "good overbought" way of powerful trends, not jumpy and grabby. Pain thresholds for stocks may lie around 3.25% on the 10-year yield perhaps above the $5 national average level for a gallon of gasoline. And, of course, the headwinds of earning warnings and forecast cuts have been noticeable, speaking to pain in consumer goods and now Intel . The valuation compression seen all year on some level is about a bumpier profit path, though the magnitude of some of the moves has been alarming. Yet overall second-quarter earnings consensus is tracking fairly well with the 20-year average pattern of intra-quarter forecast revisions, as Credit Suisse notes. Some of the same factors hurting consumer results — heavy inventories, consumer price-sensitivity — can also be seen lending credence to the "peak inflation" notion that has tentatively taken hold, though. Heavily shorted bombed-out tech has been strong, the GS Most Shorted basket up almost 5% the past couple days. ARK Innovation is trying to carve out a respectable pattern of higher lows as it convalesces. Here's ARKK vs. the S & P 500 over two years. A very long way to go, and this might just be basic mean-reversion plus hedge funds paring back shorts as well as long positions, but on the screen for possible tone change: Collapse in mortgage applications and crash in consumer surveys of car-buying interest underscore the risk to key drivers of the U.S. economy as rates rise and consumers reassess needs. Is it notable the homebuilders remain 10% off their lows as a group on the lousy mortgage-app print, or is this just noise in a sector nearly 30% off its highs? Market breadth today is slightly positive, if well mixed. The equal-weight S & P continues to hold 3-4 percentage points of outperformance vs. the market-cap-weighted version year to date, payback from the skew toward mega-cap growth within the standard benchmark. VIX is heavy as the market idles in this narrow range. There's been some concern raised about the sharp drop in the VVIX — the volatility of the VIX itself — as well as the decline in implied volatility within options prices vs. actual realized volatility. So far this year, a VVIX under 110 has meant the end of rallies and a quick market drop (late March, April 20, mid-May). Something to watch, though over a longer span of five years, the times when VVIX fell hard out of a prior range were not particularly scary moments to be holding stocks (summer 2017, early 2019, toward the end of the September 2020 correction, April 2021). We'll see.

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