Volatility Set to Rise as Tech Stocks Lose Momentum
Michael Kramer and the clients of Mott Capital own APPLE and Microsoft Long-Term
The S&P 500 rose 64 basis points on the day, though there is still little to say about the current state of the market. The technology sector lagged the broader index, with the XLK Technology ETF gaining just 22 basis points. At this point, the XLK is little more than a proxy for Nvidia, Apple, and Microsoft, with those three stocks accounting for roughly 40% of the ETF.
Looking at XLK more broadly, the sector has been largely stagnant over the past few weeks, effectively consolidating within a triangle pattern. As a result, the next move for the group is highly uncertain and could break in either direction.
The problem, of course, is that Apple shares fell by more than 1% today and dropped below their 50-day moving average for the first time since July. The technical damage could worsen if the stock breaks below the $265 support level.
Microsoft, on the other hand, has been trading below its 50-day moving average for some time and is now also below its 200-day moving average. Support around $470 appears to be pretty important as well.
I would guess that if these stocks do not recover quickly, the technology sector will have a tough time moving higher if roughly 25% of the group’s weighting is not participating positively. It is something to keep in mind over the coming days as this plays out.
In the meantime, I still expect implied volatility to rise heading into the jobs report on Friday and the CPI release on January 13. Volatility is too low at this point, and I would expect that to be reflected in the VIX 1-Day moving into the mid-teens, if not higher.
Bond market implied volatility rose today, with the MOVE index climbing to 64.7, and, like equity market volatility, bond market volatility is also really low, especially given the events coming up on the calendar.
Meanwhile, the weaker ISM report led to the spread between U.S. Treasuries and JGBs narrowing further, with the 5-year spread now at 2.11%, its lowest level since March 2022. Yet USD/JPY continues to hold near the 155 area.
-Mike
Glossary by ChatGPT
50-day moving average: A technical indicator representing the average closing price over the past 50 trading days, often used to gauge short-term trend direction.
200-day moving average: A long-term technical indicator showing the average closing price over 200 trading days, commonly used to assess overall market trend health.
Basis points: A unit of measurement equal to one-hundredth of a percentage point, commonly used to describe small changes in yields or returns.
CPI (Consumer Price Index): A measure of inflation that tracks changes in the prices paid by consumers for a basket of goods and services.
Implied volatility: The market’s expectation of future price fluctuations derived from option prices.
ISM report: A monthly economic report from the Institute for Supply Management that gauges business conditions in the U.S. manufacturing and services sectors.
JGBs (Japanese Government Bonds): Sovereign debt securities issued by the government of Japan.
MOVE Index: An index that measures implied volatility in the U.S. Treasury market, often referred to as the bond market’s version of the VIX.
Support level: A price level at which a security tends to find buying interest, potentially preventing further declines.
Triangle pattern: A chart pattern formed by converging trendlines, indicating consolidation and the potential for a breakout in either direction.
USD/JPY: A currency pair representing the exchange rate between the U.S. dollar and the Japanese yen.
VIX 1-Day: A short-term volatility index measuring expected S&P 500 volatility over the next trading day.
Yield spread: The difference in yields between two debt instruments, often used to assess relative value or economic expectations.
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