The CBOE VIX Volatility Index (VIX) retreated nearly 10% yesterday and is losing nearly 20% from local highs. A factor that supported this reaction was the rebound on Wall Street, where the S&P rose more than 1.8% in one session. As a result, demand for volatility hedging fell, fear gave way to greed, and markets returned to 'normal', showing strong hope for a return of the 'bull market' ahead of Trump's inauguration. The mood was supported by:
- Initially lower PPI inflation (on Tuesday), followed (yesterday) by a slightly lower-than-expected rise in U.S. inflation, which supported the relief rally after recent declines
- Solid results from U.S. banks and comments from Fed members, suggesting a continued disinflationary trend, with a solid economy (Goolsbee, Williams)
- Very solid Taiwan Semiconductor (TSM.US) results, including guidance above forecasts, supporting semiconductor market sentiment.
The fact is, however, that the inflation reading was actually quite mixed, and inflation will continue to be a market 'theme' in the months ahead. Similarly, Trump still carries with him a fair number of unknowns, making the first months of his presidency potentially a bit stressful for the markets. Thus, a possible rise in the VIX, from its current extremely oversold levels, remains viable. The index has reached the vicinity of 16, where we have seen consolidation in recent weeks and from which there have been significant upward price reactions.
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Source: xStation5
Yesterday's downward impulse pointed to a potential 1:1 correction, after which some attempt at a rebound may come. On the other hand, however, in the scenario of a return of the Nasdaq 100 above 22,000 points, another downward impulse of the VIX is not out of the question, and would probably mean a test of the vicinity of 14.5 - 15 points.
Source: xStation5
