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Volatility Surge Signals Event Risk Ahead of NFP - Data May Trigger Squeeze Rally

Published 01/11/2024, 05:46 pm
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Stocks finished the day lower as technology stocks took a hit following Microsoft (NASDAQ:MSFT) and Meta’s results. Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) report results tonight, and whether those will help much today is unclear. AWS revenue was in line, while Apple offered relatively weak guidance for next quarter’s sales.

Today, we also get the jobs report, which may matter just as much, if not more, as these earnings. Estimates are for just 100,000 jobs created in October, with the unemployment rate expected to hold steady at 4.1%. I have no idea how to interpret this information anymore, and I don’t think analysts do either—the range is quite wide, with the lowest estimate at -10,000 and the highest at 180,000. The whisper number on Bloomberg is 136,000.

Technical Damage

There was clearly a lot of technical damage to the charts yesterday, with both the S&P 500 futures and cash index falling out of that rising wedge. The cash market even gapped below the rising uptrend. A break of 5,690 would open the path back to 5,600, where the market was on the day of the last Fed meeting in mid-September.

The only problem for today is that implied volatility rose significantly yesterday, with the VIX reaching 23.1 and the VIX 1-Day hitting 19.2. Even the VVIX was up to almost 122. This creates a lot of potential event risk today that could spark a rally, even if the numbers would typically suggest stocks should fall. The 23 level is very important, as it has been a resistance level on the VIX for some time. Things could get interesting if the VIX spikes today; however, the chances for a Vanna squeeze post-NFP are high.

The bond market is also showing signs of nervousness, with the MOVE Index reaching its highest level in a year. MOVE Index

Arguably, you can see why by looking at that chart. The 10-year yield is at a spot where, if the data comes in stronger than expected today, we could see the start of a significant move higher, perhaps back into the 4.5% to 4.6% region. 10-Year Chart

The 1-month implied correlation index rose sharply yesterday and is likely to continue rising, as implied volatility (IV) for Amazon and Apple is expected to decrease today now that their earnings are over. This means all of the Magnificent Seven (Mag7) stocks, except for Nvidia (NASDAQ:NVDA), have returned to normal.

1-Month Volatility

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