Has Panic Peaked? VIX, Treasuries, USD and the S&P 500

VIX, USD, S&P 500 Talking Points:

• This is an archived webinar with a wide breadth of topics. I first looked at the spike in VIX which was historic in nature, then moving over to Treasuries and the Yen. Then USD-pairs and finished with equities.
• In my opinion there were/are two push points for the pain: USD/JPY de-leveraging which can bring impact to a number of macro markets. And recession fears that heated up after the Sahm rule was triggered following last week’s NFP report. That drove a bid into Treasuries which pushed lower yields, and this shows via a couple of different yield spreads, the 10-2 and the 10-year/3-month, both of which I looked at in the webinar.
• This is an archived webinar and you’re welcome to join the next one: Click here to register.

I touched on a number of themes in this webinar and did my best to incorporate price action for FX setups. In this write-up, I’ll summarize some of the high points.

 

VIX Spike

 

Last week saw a massive push in the market’s ‘fear gauge’ as VIX spiked to its third-highest level ever, rivaled only by the onset of Covid and the Financial Collapse. This is based on SPX options so when we see this flare higher, it’s often a lagging variable to price; and in many cases investors will look to spikes to fade VIX and look on the long side of equities.

However, as I shared, timing VIX is or can be just as difficult as timing price. If we go to the source of the move, there are two different drivers: USD/JPY carry unwind, which I think has more room to go, and on setting fears of recession risk which pushed ahead with last Friday’s NFP report.

 

VIX Monthly Price Chart: Third Highest Spike Ever

Chart prepared by James Stanley; data derived from Tradingview

 

Spike in VIX – Rally in Treasuries (Prices up/Yields Down)

 

The spike in VIX helped to drive a massive push of capital into Treasuries and there’s a shared relationship here. As recession risk or probability increases, so does the idea that more rate cuts will be in-play. More rate cuts can equate to lower yields and correspondingly, that brings higher bond prices.

So, if you’re a hedge fund or a portfolio manager, buying Treasuries ahead of expected rate cuts can be a pretty attractive trade, and that’s what we’ve seen of late. It can also be more attractive than chasing stocks at exuberant valuations and that can further draw capital out of riskier asset classes, and into Treasuries.

In ‘TLT,’ the ETF representing Treasuries with 20+ years to maturity, there’s been a strong spike as price has broken out of a symmetrical triangle pattern. Last week was its strongest week since the first week of March in 2020, which is when the pandemic was setting in (also when markets began to expect the Fed to push rate to the floor in response).

TLT gapped up again to start this week and as markets have started to pullback from the ledge, TLT has seen some profit taking. But – the big question here is whether buyers show up for support at prior resistance, which keeps the door open to bullish continuation. The level around 94.00 remains of interest for higher-low support potential.

 

TLT Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

USD/JPY Carry Unwind

 

There’s no denying impact of JPY carry unwind on macro markets. The Bank of Japan intervened on July 11^th just minutes after the US CPI report. That also marks the top for NQ and a clear behavioral change showed after.

Initially, the July 11^th move was prodded by intervention, but it was the rate hike last week that really unsettled matters as that shows the Bank of Japan lifting rates as the Fed moves closer to expected cuts. This narrows the carry and given how crowded that trade had become with Japan keeping rates negative or close to zero for so long, there were a lot of longs that suddenly wanted to close positions.

In the webinar I shared a stat that I read where a major bank has said that ‘50% of the carry has unwound’ and I take issue with this stat. From the chart below, there hasn’t even yet been a 38.2% retracement of the 2021-2024 major move which was largely pushed by the carry.

This is a market – so its price is determined by supply and demand, driven by sentiment of investors as predicated by fundamentals and technicals. Given that there’s likely a lot of longs still holding on here, there could be significant continuation of carry unwind. This could be tough to time, however, but tests of longer-term lower-highs could bring sellers back into the mix.

To me it seems like the BoJ is unlikely to hike much but the big question now is US policy and Treasury rates. That rush for yields discussed above could be an attractive alternate for long USD/JPY carry traders.

 

USD/JPY Weekly Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

 

USD/JPY Shorter-Term

 

Prices are driven by supply and demand as pushed by investors, and this shows on a multitude of timeframes.

When a market shows an almost linear move to shed 1,000 or 2,000 pips in a short period of time then, logically, there’s a lot of shorts that will be looking to cover. And meanwhile, nearby stops have already been executed which can reduce the amount of supply coming into the market. This is what helps to build counter-trend pullbacks, such as we’re seeing right now in the S&P 500; but the big question is how bears respond on tests of longer-term lower-highs (and shorter-term higher-highs).

In USD/JPY, the areas that I’m tracking are at 146.50 and then at 148.00. Each would offer bears a chance to sell at a higher-price than the oversold spike that started the week. If bulls can power through that, well that says something and there may be more recovery in store, perhaps to a 150.00 type of level.

 

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley, USD/JPY on Tradingview

 

USD

 

JPY is a 13.6% allocation into DXY so when we saw that sell-off in USD/JPY last week, the US Dollar similarly sold off.

But – in DXY that sell-off stalled at an important level, the 76.4% Fibonacci retracement of the October-December bearish move. The bounce from that has so far held resistance at the 61.8% retracement but like USD/JPY above, the door is open for further recovery themes. The next major spot of resistance overhead is around the 104.00 level, which is the 50% mark of the same Fibonacci setup.

 

US Dollar, DXY Daily Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

S&P 500

 

The S&P 500 put in a nasty spill last week that broke the support-side of a rising wedge pattern. And that very much continued through this week’s open, with a test below the 5200 level. But, like other markets, this is supply and demand-based and that short-side theme came on very quickly.

Around the US open yesterday there was a bit of support starting to show and the services ISM report beat expectations, allaying fears that the US economy is already in a deep drawdown. That’s helped to produce a support bounce, which is likely a combo of short-cover and legitimate buying interest, and this shows as a wide and extended underside wick on the weekly chart.

 

S&P 500 Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

S&P 500 Shorter-Term

 

This is an updated version of the chart that I had shared on X yesterday, but the bounce in the early-portion of the session led to a V-shaped move and a hold of resistance at 5277. But – that also represented a higher high as buyers were able to drive through 5,200 and kept the door open for a higher-low.

That showed at 5200 later in the session and that was followed by another higher-high, with a test of 5,300 overnight. From that, another higher-high and another higher-low appeared, setting the stage for a re-test at a massively important level.

I’m tracking next resistance at the 5,344-5,357 zone, the latter of which was last week’s close. So this highlights a closure of this week’s open gap and that would be an open area for sellers to re-appear. If they don’t – and if price breaches above, the look goes higher for similar scenarios.

 

S&P 500 30-Minute Price Chart

Chart prepared by James Stanley; data derived from Tradingview

 

--- written by James Stanley, Senior Strategist