Stocks rallied to finish the week of Oct. 1, with the rising by 1.15%. The advance on Friday coincidences with a volatility crush, with the VIX, falling by 8.6% to finish at 21.1 on Friday. The S&P 500 also had a relatively soft finish despite a huge buy imbalance at the end of the day, dropping nearly 50 bps from the day’s peak in the final hour. It would suggest to me that the rally was a volatility-induced short-covering event into the weekend.
Like in our example from last week, once the VIX bottomed and started to move higher, the buying in the S&P 500 reversed.
I have found it interesting that each time the spikes and retreats, it corresponds to the S&P 500 making a lower high. For example, on Sept. 10, the VIX closed at 21 and the S&P 500 at 4,458. On Sept. 17, when the VIX was 21, the S&P 500 was at 4,432. On Sept. 22, the VIX was at 21, and the S&P 500 was at 4,395. And on Oct. 1, the VIX was at 21, and the S&P 500 was at 4,357.
It tells us that there is not much, if any, fear in this market currently. Given that, it seems hard to argue that a bottom is in place, especially when the rallies have been implied volatility induced.
Nearly the same thing happened with the VIX in 2018, with the S&P 500 making new lows while the VIX made lower highs. It wasn’t until the final leg lower that ultimately pushed the VIX higher, concluding the decline.
2. S&P 500
The fell sharply on Sept. 30 once the bear flag broke. Most interestingly, the rally on Oct. 1 seemed to be a retest of that break lower, with the future reaching and touching the base of the flag and then reversing lower. We should see a retest of the 4,300 early this week, with a break lower towards 4,225.
Micron Technology (NASDAQ:) is about ready to take its next step lower. There are reports from Digitimes that indicate memory chip prices are heading lower, and that can’t be good for Micron. Couple that with some bearish options bet last week, and all it will take is a drop below support at $70 to get this rolling lower to $58. I got into more detail in my member’s area, which you can try for the first 2-weeks for free.
Merck & Company (NYSE:) turned out to work well, with that positive data that came for its COVID treatment pill on Friday. The stock surged more than 8%, rising to a high of just over $84. The options traders did an excellent job with this one. I this last story Sept. 13.
Ford Motor Company (NYSE:) has surged, much to my surprise. It just didn’t work out the way I expected it. So I gave up on this one falling. I had noted at the end of August that I thought it could drop below $12. I suppose it could rise to around $15.
Teladoc (NYSE:) continues to push lower, and I’m still waiting for this one to fall to around $114.
Walmart (NYSE:) looks oversold at this point. I don’t think it has bottomed yet, but that doesn’t mean it can’t have a bounce higher over the very short term. The most logical place to bounce, too, is back to $142.