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Bond Market’s Bruising Spreads to Stocks

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May 12, 2015

Soggy trading at the get-go today as stocks largely track the bond market. Although we did have a stock index selloff Monday, particularly on the close, volume was very light and in a tight range. The S&P 500 (SPX) ended in the red but held 2100 again, a positive for the bulls. The key driver for stock and bond trade was another tough session for the Treasury market, an indicator of interest rates that could send signals well ahead of any Federal Reserve policy response. The benchmark 10-year yield, a barometer for mortgages and other lending rates, nosed up to 2.27%. Watch for thin-volume trading to intensify in the lead-up to the much-anticipated monthly retail sales figures due out Wednesday morning. 

VIX‘s Late Move. The most interesting trading of Monday arguably took place in the CBOE Volatility Index (VIX). The market’s “fear gauge” rose nearly 8% Monday to end the day at a session-high 13.85 (figure 1). The value of premium changing hands, at more than $100 million, is the busiest day of recent memory in the VIX contract. In a simplified breakdown, positions favored a rise in VIX that theoretically would pay off with a selloff in equities. So bonds and VIX – two indicators that could be a curtain raiser for the next leg in equities.

VIX-Fear_Gauge-TD_Ameritrade

FIGURE 1: FEAR BUBBLES UP? The CBOE Volatility Index (VIX) remains off the one-month highs above 16 hit last month but is springing to life. That included a late-day nearly 8% jump on Monday to finish at session highs. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

More Jobs Data. This report is a Fed favorite and is increasingly gaining traction among investors. It’s the Labor Department's Job Openings and Labor Turnover Survey, or JOLTS, due out midmorning. The survey looks at available job openings. Last month, JOLTS indicated 5.13 million jobs were open, breaking the closely watched barrier of 5 million. For comparison, in mid-2009, open jobs bottomed out at just above 2 million. A Bloomberg News survey estimates that 5.15 million to 5.16 million jobs will be reported open on the April survey due out today.

Deal News. The broader stock market may find some support on deal buzz. AOL (AOL) is an early sharp gainer after the Internet content company agreed to be bought by telecom giant Verizon Communications (VZ) in a deal valued at $4.4 billion. Verizon will pay $50 for each AOL share, which represents a 17% premium to Monday's closing price. The deal is expected to close in the summer. Verizon said it expects to fund the purchase with cash on hand and commercial paper. Verizon's stock fell in early trade.

Good trading,
JJ
@TDAJJKinahan

JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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