Zzzzz…

Zzzzz…

Even amidst a fairly exciting market, there can be periods where not much is really happening. I’d say that’s been the case lately. We keep going nowhere, though admittedly in a somewhat volatile manner. Below is a 1-month chart for the S&P 500.

So, what can we do during a sleepy period? There’s always something to do. In general, you can prepare for the future. While in calmer times not much can happen for quite a while, that’s not the case here. This is more like a lull in the storm. I can say that with confidence because I can look ahead and see there’s quite a bit happening in the week starting on 6/13, so we only have one more week of relative quiet.

What’s happening on the 6/13 week that’s such a big deal? On that Wednesday, 6/15, we have both VIX expiration and the FOMC. Then on 6/17 we have OpEx, where monthly options expire.

The FOMC is widely expected to see another 50bps rate hike. Unless the 6/10 CPI report shows a dramatic slowdown in inflation, the expectation is that the language surrounding the Fed will stay pretty hawkish. As for OpEx, it’s a quarterly expiration, and it’s near the biggest ever, with $3.2T in options expiring, according to Goldman.

VIX expiration and OpEx are both pretty big, really. VIX has been reset higher with the extra volatility, and that has made its expiration have more impact. The current front-month VIX doesn’t price in the FOMC meeting, which implies two basic things, to me. First, we could potentially see VIX be relatively subdued for the next several days as vol decay sets in. Once we pass VIX expiration, FOMC and OpEx, though, we have a good chance of VIX resetting higher. The last two months saw a stock market rally prior to the VIX expiration, and I’d expect the same here, at least more or less.

Over the last several years, as the options market has become larger, OpEx often sets up as a turning point for the stock market. Considering the issues that we have out there, it seems extremely unlikely that put protection is going to be allowed to expire. That said, it’s a little hard to say for sure just what will happen. In a vacuum, I wouldn’t be shocked to see some amount of mean reversion. Thus, if we managed to get up to 4300 on SPX, I could see us going lower. If we get to 3900, maybe we get a bounce.

In the end, it’s largely been a grind lower in the market this year, similar to what we saw in 2000. Honestly, that seems like the preferred path for the Fed. In part, that action is due to the market spending a fair amount of time being fairly well hedged. Should we just expect that same trend to continue? That does seem most likely to me, and considering what the Fed is doing with rate hikes and QT (quantitative tightening) risks are more likely to the downside, at least over time.

Thus, we’ve been working on deleveraging a bit. To the extent that we do, in fact, get a happier market as we approach VIX expiration, we’ll get even more conservative. While we can get bear market bounces, the factors that have created this grind lower just aren’t going away anytime soon. We’re using this quiet period to look at our portfolios and cast out what looks challenged for the troubled environment ahead.