Stocks Suffer From a Lack of Confidence

Andrew Giovinazzi

Yo Pit Crazies,

The SPX took a break this week and decided to do nothing.

The Invesco QQQ Trust (Ticker: QQQ) is the refuge of all equity investors lately, as strong balance sheets are attracting dollars and weak banks are still leaking dollars like a ship with a hole in the bottom.

There are different times I can remember, in my nearly 34 years of being a market participant, when trading was in a “surreal” state. Gulf Wars, underwater oil leaks, banking crises – all unpleasant and added to a state of illiquidity in the markets. No one wants to play because they are waiting to see how things turn out.

Then the market functions again. It was a unique perspective of being a liquidity provider in times of crisis that I could feel the sentiment change. The bank issue is a giant cloud still over the economy and the financial system.

2 week SPX chart with 1 min candles

When will it get solved?

The VIX Curve Says “Not Anytime Soon”

Besides the small profit taking session on Friday, QQQ stock remains strong as investor dollars pile into what appears to be a sure thing in the guise of AI and endless profits from its application. Big Tech is uniquely positioned to take advantage of the new technology.

The bullish case aside, Main Street companies and banks cannot find a bid – anywhere, anytime. That’s what has traders bidding up the volatility in the SPX.

Historically, as we measure it in Option Pit, abnormally high contango is a precursor to a market selloff. Think of it like this: something is wrong, but we don’t know exactly what it is yet.

VIX curve with 3.57 of contango in the Jun21 cycle

Current Volatility Risk Premium (VRP) is seven points above realized volatility. That is very high and indicative of both illiquidity and sentiment. No one wants to sell the juice.

I think there’s opportunity in buying the Main Street stocks, but use a put for protection. Give the market something if it decides to sell off.

Looking at the past, we usually get past the short term uncertainty, but the VIX says some rockiness is on the way.