It wasn’t too long ago that the market was reacting (or overreacting) to every piece of news that was published. Over the last month and a half, the markets have settled down some. That can be seen from the VIX (volatility index) which has been steadily decreasing since the mid-June market lows.
Remember, the VIX tends to operate inversely to the market, so as the market is pushing higher, we’re seeing volatility drop to levels we haven’t seen since mid-April. If you look at the chart above, the VIX peaked in the second half of 2021 at the level we have now, so you can see just how long we’ve been at this stage of heightened volatility.
What does that mean for the markets? Well, as option sellers, you typically receive less premium as volatility drops, but the flip side is we are less likely to see the violent swings in the market day-to-day. This helps trades like Iron Condors and Spreads. Theta decay acts more normal and you don’t have to wait until the day of expiration before your option prices decrease in value. However, if volatility starts increasing and making options more expensive, it will take longer to get out of those types of trades, even if the underlying moves in the correct direction.
While we are still in the midst of earnings season, we just may see volatility continue to drop though. The market barely reacted to the ISM Manufacturing Index report that came out today saying manufacturing continued to decline this past month. Are we finally entering a market phase where we calmly react to the news? We will find out this week as all eyes will be focused on the job situation.
Without further ado, let’s take a glance and the reports this week that have the greatest chance to move the markets.
Wednesday – Petroleum Status Report – 10:30 am EST – We are expecting to see inventories decline, meaning a rise in demand for cruise oil and gasoline. Despite rising interest rates and a potential sluggish global economy, crude oil is still in demand.
Thursday – International Trade In Goods and Services – 8:30 am EST – The deficit is expected to shrink by nearly $6 billion, which is a good sign for U.S. exports.
Thursday – Jobless Claims – 8:30 am EST – The market is expecting to lose 5k more jobs this week than last. That would mean 256k lost jobs, which would move the 4-week moving average to 249.25k jobs. I keep saying these are historically low numbers and that remains true. This is still something we want to watch out for to see if the interest rate hikes eventually start crippling the job market.
Friday – Employment Situation – 8:30 am EST – The unemployment rate is expected to remain at 3.6%, and the average hourly average wage is expected to come in at a 5% year-over-year increase. Did you get your 5% raise this year?
As far as sector rotation goes, Technology continues to be atop of the relative performance leaderboard, helped by earnings from the likes of Microsoft and Alphabet last week. Utilities and Industrials are still performing well over the 1-week, 1-month, and 3-month time frames.
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