Stocks closed flattish on Friday after a weaker-than-expected University of Michigan report showed that consumer confidence plunged and inflation expectations rose.
The report caused a rather sharp reversal in risk assets while rates pushed higher. This week will be filled with inflation data, retail sales, and a May Opex. Also, there will be the usual slew of Fed speakers weighing in on thoughts of monetary policy, along with a Jay Powell Q&A session on May 14.
I would expect this week to see greater volume than the previous week. Last week’s volumes in the S&P 500 futures were holiday-like, much lower than usual. Given that volume was so low, one questions the validity of the move last week in the indexes.
With a Powell Q&A session and a PPI report on Tuesday, it won’t be surprising to see implied volatility bid and the VIX 1D move higher, potentially moving higher again on Tuesday into the CPI report on Wednesday.
Given that we are likely to see IV bid to start the week, the week can be challenging, with a decline in IV in the second half of the week as event risk passes.
The VIX 1D has typically surged heading into the CPI report, reaching 19 on March 11 and 18 on April 9. It wouldn’t surprise me at all to see the VIX 1-day move up from its current 8 to around 18 or 19 for the Wednesday CPI report.
What it does mean is that the higher the VIX 1-Day gets ahead of the CPI, the more likely it is that a volatility crush or Vanna squeeze is followed by the release of the CPI as event risk passes. It is something to look out for, which means one of those surges in the market that leaves everyone saying the market doesn’t care.
The other odd thing that may play a factor this week is that the QYLD ETF, which sold an NDX May 17, 17,250 Covered Call last month, is due to be repurchased on May 16, one day before the May expiration.
The covered call has a notional delta value of about $9 billion, and that means as long as the NASDAQ doesn’t fall below 17,250, we are likely to see some buying pressure in the market on Thursday. Of course, a new position for the June opex will be created on May 17, which could create selling pressure in the market on Friday.
Unfortunately, a few mechanical forces are at play this week that could potentially make the market do some strange things, such as a rally following a hot or cold CPI report or the potential to rally before OPEX. This makes betting on data a risky venture. You could be right on the outcome of data but then have the market not respond as you expected.