Checking In on Some Favorite Charts

So far this week, we have been churning just above the 6,000 level for the S&P 500 (SPX).  That’s relatively normal; round numbers often act as support and resistance levels.  This seems like an opportune time to look at some secondary indicators that could provide some color about whether we are hitting a difficult wall or simply taking a breather.  Quite frankly, while none of them offer a clear signal about the direction of the next move, they do offer some perspective about traders’ attitudes about risk going forward.

While it has been obvious that we are benefitting from a considerable focus on momentum, with a particular emphasis on growth stocks.  The first chart makes the distinction apparent.  Since the lows on April 8^th, the S&P 500 Growth Index (SGX) has outperformed its Value counterpart (SVX) by more than twofold, with SGX up over 27.3% through Friday, more than double SVX’ 13.5% jump:

Daily Data Normalized to April 8^th: SPX (orange), SGX (white), SVX (blue)

Source: Bloomberg

Past performance is not indicative of future results

Interestingly, when we look at the same data on a year-to-date basis we see very little difference in overall performance, with SGX up 3.9% and SVX just about breakeven.  Both compare reasonably well with the SPX 2% advance on the year through Friday:

Daily Data Normalized to December 31^st: SPX (orange), SGX (white), SVX (blue)

Source: Bloomberg

Past performance is not indicative of future results

These charts are a classic reminder about risk and reward.  The lesson here is that not only have growth stocks driven the market higher recently, but they also had a disproportionate effect in driving the market lower during the post “Liberation Day” chaos.  Crowded trades that are driven by momentum outperform on the way up but also underperform substantially on the way down. 

This has significant implications for hedgers.   Our playbook of “don’t fight the tape, but insure against it” has been to refrain from getting in the way of the momentum freight train, but to be opportunistic about buying insurance against a pullback.  The above graph shows that it likely behooves traders to more specifically hedge against a drop in the Nasdaq 100 (NDX) or another set of stocks that is (even) more heavily weighted with megacap tech stocks than SPX.  Quite frankly, SGX and NDX move essentially in lockstep, as we see when we add NDX to the above graph:

Daily Data Normalized to December 31st: SPX (orange), SGX (white), SVX (blue), NDX (magenta)

Source: Bloomberg

Past performance is not indicative of future results

That said, it doesn’t appear as though many traders are particularly interested in hedging right now.  The Cboe Volatility Index (VIX), which I view more as a gauge of institutional demand for hedging protection than a “fear gauge”, has been mired around the 17 level recently.  That is more in line with its historical long-term average than the 15-ish levels that prevailed around SPX’s prior flirtations with the 6,000 level, but it has been falling steadily over the past few weeks since it’s tariff-related outburst:

1-Year Daily Data, SPX (blue, left scale), VIX (white, right scale), with horizontal line at SPX=6,000 and yellow lines at prior times SPX rose above 6,000

Source: Bloomberg

Past performance is not indicative of future results

We have noted that correlation is a key factor affecting the volatility of an index, with higher correlations among index components leading to higher volatility for the index itself.  Thus, it is useful to see if correlations are influencing the level of VIX now versus those prior occurrences.  We can see from the chart below that correlation, as measured by the Cboe 1-month Implied Correlation Index (COR1M), is well above the levels that prevailed the last times that SPX saw 6,000.  Therefore, it is neither unreasonable, nor a significant sign of less fear to see VIX quoted above those prior occurrences:

2-Years Daily Data, COR1M (white, right scale), VIX (red, right), SPX (green, left)

Source: Bloomberg

Past performance is not indicative of future results

Finally, it is worth checking in with options activity to see if it is leaning disproportionately toward calls over puts.  On an aggregate level it is, but it has become rather unusual for overall put volume to outweigh call volume.  We see that the 20-day moving average of the Composite Put/Call ratio rarely rose above 1 in the past five years and has not done so in nearly two years.  In any event, we see that ratio holding above the levels that prevailed in the period after the election and before the tariff announcements:

5-Years, Daily Data: 20-Day Moving Average of Composite Put/Call Ratio (orange, right scale), VIX (blue, left)

Source: Bloomberg

Past performance is not indicative of future results

Interestingly, the following chart shows how the nature of the options market, and thus the Composite Put/Call ratio has changed.  The following chart shows the 21-day moving average of the Index Put/Call ratio.  Notice how it has settled into a newer, lower range since late 2022.  It is hardly a coincidence that the trading of daily expirations on key indices, especially the cash-settled SPX variety, surged in popularity after Tuesday and Thursday expirations were added in 2022, and that the bull market since then has driven a strong preference for trading calls over puts on so-called 0DTE options.  Quite frankly, that’s where much of the action in the options world is occurring.

5-Years, Daily Data: 21-Day Moving Average of Index Put/Call Ratio (magenta, right scale), VIX (blue, left)

Source: Bloomberg

Past performance is not indicative of future results

The takeways:

1. Equity markets are sanguine, but not fully complacent.
2. If you’re going to hedge, it’s likely better to hedge market exposure with NDX-linked, rather than SPX-linked products
3. Traders love 0DTE calls!