Higher sticker prices fail to shock

Stocks had a mixed close, compliments of a late session rally as investors were cautiously pleased with earnings… so far. Lower expectations for earnings are being met, but is that enough to get stocks out of their sideways rut?

The calm? The term “calm before the storm” is so trite that I try to avoid it, with emphasis on the verb “try.” I have most likely used it as a tagline in the past, possibly even more than once. That means that perhaps we can look back at what happened in the past when I have used it. No, that would not be helpful, let me explain.

The VIX Volatility Index is an index that attempts to provide a real-time estimate of the expected volatility of the S&P500, everyone’s favorite proxy for… well, stocks. I won’t get into the intricacies of its calculation, but it is based on S&P500 options contracts on the CBOE. Because it is a measure of the index’s volatility, it tends to spike up when the S&P drops… for obvious reasons. That is why some traders like to use it as a hedge of sorts. Caveat emptor: it is very difficult to use the VIX as a hedge in practice despite the marketing hype out there, so if you are thinking of hedging, speak with an expert.

For today, let’s just think of the VIX as a measure of stock index volatility… as the index’s description advertises . Have you felt that the markets have been somewhat chill lately? I know that by long-term historical standards, the types of moves we get on a daily basis feel somewhat larger, but when compared with the moves we have witnessed since 2020, sessions like we have been having for the past months or so seem to be rather tame in nature. Aha, perhaps we should consult the VIX Index! Check out the VIX Index chart (number 5) in my daily chartbook. Now, I know that the chart has many ups and downs, but if you take a step back you will see that the trend is negative and that yesterday’s close is just above its 1-year low. “Ok, so what, Mark,” you are thinking. The reason I bring it up is that traders typically look at points of low volatility as the calm before a storm. Investors get complacent, they may get distracted, or overly confident, and that is the time to strike. I liken it to a coil snake ready to strike.

There is another interesting way to measure volatility. The technical indicator Bollinger Bands measures the standard deviation of a stock or an index. The indicator then paints lines a standard deviation above and below the index. A common one is +/-2 standard deviations. There are many ways to interpret the index but when the price of the underlying hits the top, it is +2 standard deviations above its recent average price which can mean that it is considered relatively expensive. But I am not here to talk about trading strategies, please do your homework before even considering doing that. No, I like to use the Bollinger Bandwidth, pictured below. It simply measures the distance between the top line and the bottom. Because the indicator is based on standard deviation, a measure of volatility, when the bandwidth gets bigger there is more volatility, and vice versa. You will notice on the bottom panel that the bandwidth is right above a recent low, meaning that the width of bands is closer than it has been for a while, another indicator of low volatility. Can you see what happened last time a low point occurred? Volatility spiked and stocks took a turn for the worse. This is another indicator of the coiled snake. This is where I have to remind you of an important point regarding volatility. IT WORKS IN BOTH DIRECTIONS! Meaning, that when the snake strikes, the S&P500 can spike down OR UP. It is up to you to decide which.

WHAT’S SHAKIN’ THIS MORNIN’

General Motors Co (GM) shares are higher by +3.35% in the premarket after it announced that it beat EPS and Revenue estimates. The company also raised its full year guidance citing stronger than expected US demand in the first quarter. Dividend yield: 1.04%. Potential average analyst target upside: +42.5%.

United Parcel Service Inc (UPS) shares are lower by -4.72% in the premarket after the company announced that it missed sales estimates in the last quarter. The company cited weakening unit demand in the quarter which resulted in results coming in on the lower end of its prior guidance. UPS guided that its full year revenue will likely come in on the lower end of its guidance as well. Dividend yield: 3.03%. Potential average analyst target upside: +0.1%. WHY IS THIS SO SMALL? Because the current price of the stock is just below the average of analysts’ 12-month targets. While this might be interpreted as the stock having no upside, it does not mean that the stock cannot continue to climb.

ALSO, this morning, Centene, Danaher, Dow Inc, TransUnion, GE Healthcare, 3M, Halliburton, Tenet Healthcare, Raytheon, Biogen, PulteGroup, McDonald’s, General Electric, Polaris, PepsiCo, Sherwin-Williams, and Fiserv all beat on EPS and Revenues. Verizon, Northern Trust, Ares Capital, and Archer-Daniels-Midland came up short.

YESTERDAY’S MARKETS

Stocks had a mixed closed with investors unsure of the Fed’s next moves and what a slowdown in earnings growth means. The S&P500 gained +0.09%, the Dow Jones Industrial Average advanced by +0.20%, the Nasdaq Composite Index fell by -0.29%, and the Russell 2000 Index declined by -0.15%. Bonds gained and 10-year Treasury Note yields lost -8 basis points to 3.49%. Cryptos slipped by -0.17% and Bitcoin gave up -0.17%.

NEXT UP

• FHFA House Price Index (Feb) is expected to have slipped by -0.1% after gaining by +0.2% in January.
• New Home Sales (March) may have declined by -1.3% after climbing by +1.1% in the prior period.
• Conference Board Consumer Confidence (April) is expected to have pulled back slightly to 104.0 from 104.2.
• After the closing bell earnings: Chipotle, Universal Health Services, Juniper Networks, Visa, PacWest Bancorp, CoStar Group, Alphabet, Microsoft, Texas Instruments, Boston Properties, and Enphase Energy.