Archive for May, 2012

CBOE S&P 500 Volatility Index (VIX) Poised To Move Sharply Higher

Posted in CBOE Volatility Index (VIX) on May 17th, 2012 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

A bullish reverse “Head & Shoulders” pattern appears to be developing on the CBOE S&P 500 Volatility Index (VIX) suggesting that a sharp move higher in this index is likely to occur soon. While bullish for buyers of “volatility”, this pattern is clearly bearish for the S&P 500 Index, since there is a high inverse correlation between the two.

Thursday night’s revelation of J.P. Morgan’s unexpected “hedging” loss of roughly $2B, along with worries that similar losses could be present on the balance sheets of other big banks has clearly moved to the “front line” of investor fears. The impact of last week’s European elections and the policy shifts that they imply, have also altered the uncertainty factor that trouble investors.

A series of sub-par trading sessions (volume wise), a cloud of relative indifference to either good or bad news, and the sense that investor confidence is eroding again has resulted in a period of “range trading” in recent weeks, despite higher-than-expected consumer confidence readings.

A decline in commodity prices along with persistently low 10-year Treasury and Bund yields might be viewed as evidence that capital is shifting away from risk assets and into assets that are perceived to be “safe”. While the “safety” issue is debatable, the expectation for another round of quantitative easing is growing. Before such an announcement could be made by the Federal Reserve, however, a broad based selloff in equity prices might occur first.

Global Worries Could Send 10-Year Treasury Yields To New Lows

Posted in 10-Year Treasury Note (TNX) on May 9th, 2012 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

A weaker-than-expected 2.2% rise in Q1 GDP, a disappointingly dismal monthly jobs report and a likely political shift away from austerity measures in Europe sent German 10-year bunds to a record low yield of 1.58% last week. In concert with German yields, yields on U.S.treasury 10-year note (TNX) fell to a closing level of 1.88%. While Friday’s close was still above its record low of 1.696% set last September, they appear poised to set new record lows in the weeks just ahead.

While a shift away from austerity in Europe hints of a move toward massive fiscal stimulus and the possibility of a rise in inflation rates, the more immediate threat of a default on sovereign debt in Spain or Greece is troublesome in the near-term for stability of European banks.

Adding to the likelihood of a move toward lower 10-year note yields was a sharp drop in crude oil prices on Friday. An unexpected 2.84 million gain in crude oil inventories pushed the overall U.S. stockpile to 375.9 million barrels, a 21-year high.

Although monthly technical oscillators remain in an extreme condition on U.S. 10-year Treasury notes (TNX), a push down toward key “channel bottom” support (in terms of yield) that now sits at the 1.40% level is clearly possible.

Currently, U.S. 10-year notes remain above German bunds as well as Japanese JGBs, which are currently offering yields below the 1% level making U.S. bonds relatively attractive. Nevertheless, the Treasury department is scheduled to sell $24 billion fresh 10-year treasury notes on Wednesday, which could temporarily depress bond prices and lift yields a bit in front of the auction. It will be the auction results and the digestion of those notes that could trigger a renewed move toward lower yields.