The Week that Was: January 24 to January 28

A concise weekly overview of the U.S. equities and derivatives markets

Last week (January 24 – January 28), U.S. equity markets experienced dramatic daily swings but daily closing values arguably masked the degree of intraday volatility. The 9-day S&P 500 Index average true range is 105 handles. The S&P 500 Index, which is down 7% for the month, may suffer its worst January performance in decades depending on the January 31 close. Likewise, the small-cap Russell 2000 Index shed 12.4% in January and has declined 22% since its November highs. Looking “under the hood,” the Energy sector is the only positive performer, up 16% in January. The Financials sector is lower by 2.6%. The laggards are Technology, which lost 11.4% month-to-date, and Consumer Discretionary, which is down 14.8% in January.

Shifting to the bond market, the U.S. Treasury yield curve continued to flatten. The shorter-dated maturities continued to selloff (yields up) and the back end of the curve was relatively stable. The 2-year U.S. Treasury yield has climbed for six consecutive weeks. The Fed signaled its intent to fight inflation, which it no longer views as transitory, during the press conference following the January Federal Open Market Committee’s (FOMC) meeting. The Fed Funds futures market is now pricing in the potential for a 50-basis point increase at the March FOMC meeting. In total, the market is currently pricing in five interest rate hikes this year, which would put the Fed Funds target rate between 1.25% and 1.50% at the end of 2022.

In terms of economic data, fourth-quarter Gross Domestic Product (GDP) showed 6.9% growth (annualized). Expectations called for 5.5% or more. Consumer spending remained strong at the end of last year. Looking at full-year data, GDP was higher by 5.7%, which is the strongest annual GDP data since 1984.

Roughly one-third of the companies in the S&P 500 Index have reported fourth-quarter 2021 earnings. Thus far, earnings growth shows 24% year-over-year gains but the market seems to be pricing in the prospect of slower growth in the coming quarters. On Friday, the Bureau of Labor Statistics will release the December Nonfarm Payroll data. Estimates forecast a gain of 200,000 jobs during the last month of the year.

Quick Bites

Indices

• U.S. Equity Indices swung wildly and ended the week with mixed performance.
• S&P 500 Index (SPX®): Increased 0.7% week-over-week, closing just below its 200-day simple moving average. 
• Nasdaq 100 Index (NDX): Increased fractionally week-over-week.
• Russell 2000 Index (RUT℠): Decreased 0.83%. week-over-week.
• Cboe Volatility Index™ (VIX™ Index): Declined 1.19 vols week-over-week. Last week, the VIX Index measured as high as 38.94 before closing at 27.66.

Options

• SPX options average daily volume (ADV) was 1.92 million contracts per day, below the previous week’s average of 2 million contracts per day. The one-week at-the-money (ATM) SPX options straddle (4,430 strike with a 2/4 expiration) implies a +/- range of about 2.9%.
• VIX options ADV was about 960,000 contracts last week, which was higher than the previous week’s ADV of 800,000 contracts. The VIX options call-put ratio was 0.92:1.
• RUT options ADV was 48,050 contracts, down from the previous week’s ADV of 78,900.

Across the Pond

• The Euro STOXX 50 Index decreased 1.9%.
• The MSCI EAFE Index (MXEA℠) decreased 3.6% and the MSCI Emerging Markets Index (MXEF℠) decreased 4.5% week-over-week.

Charting It Out

Observations on VIX futures term structure

• The VIX Index moved to the highest levels since just after the 2020 U.S. elections on Monday. The VIX Index declined significantly by the end of the week,  ending the week lower by 1.19 on a week-over-week basis.
• The VIX futures term structure can best be described as flat. The February (Month-1) VIX futures settled in line with the March (Month-2) VIX futures, so the Month-1/Month-2 spread is no longer technically backwardated. The VIX Index closed above the VIX futures.
• The February VIX futures contract fell by 0.40 on the week and closed at 27.10. The March VIX futures contract increased by 0.20 for the week and also settled at 27.10. 
• The middle and back of the VIX futures curve is very flat. The Month-3 through Month-9 contracts all settled within 0.35 of 26.50.

VIX Futures Term Structure

Source: LiveVol Pro

Macro Movers

• The 30-year U.S. Treasury yield closed at 2.09%, higher by one basis point week-over-week. The 10-year U.S. Treasury yield ranged from 1.86% to 1.71%. The 10-year yield closed at 1.78%, compared to 1.77% the week prior. The 2-year U.S Treasury yield moved up another 16 basis points to 1.17%.
• The probability of five interest rate hikes and/or 50 basis point moves seems more likely based on Federal Reserve Chair Jerome Powell’s press conference last week.
• The next Federal Open Market Committee (FOMC) meeting will be held on March 15 and 16. The Fed’s asset purchase program will likely conclude by then and the market expects Fed Funds to increase at that meeting.
• The S&P GSCI gained another 1.88% last week. Natural Gas continues its volatile swings. Last week, Natural Gas climbed 16.5%. Crude Oil (WTI) added another 3.25% and traded at the highest levels since 2014.
• Copper, Silver and Lumber futures fell by 4.3%, 7.7% and 10.4% respectively.
• The U.S. Dollar Index (DXY) increased on the heels of the Fed meeting and is now at 18-month highs.  
• Big Tech mostly rebounded last week. Apple, which is the largest constituent holding in the S&P 500 Index, and Nasdaq announced record earnings.
• Apple noted that sales increased by 11% and the company said it believes supply chain issues are improving.
• Tesla also reported earnings that were ahead of consensus estimates, but shares fell following the news. The company indicated that its supply issues may continue well into 2022. From November (intraday) highs to January lows, Tesla shares declined 36%.
• Meta shares fell below $300 for the first time since mid-May 2021.

Major Cryptos

Bitcoin

• Last week Bitcoin (BTC) traded between $38,400 and $33,000, declining 0.8% relative to the previous Friday.
• The 52-week low for BTC is around $30,000.

Ethereum

• Ethereum (ETH) ranged between $2,700 and $2,200 last week, ending the week down 7.8% at $2,500.
• The 52-week low for ETH is around $1,000.

Coronavirus

• The 7-day average COVID-19  infection rate in the U.S. continues to improve. Daily cases are declining rapidly but remain very high, historically. The average moved to approximately 589,000 on January 28, down from approximately 735,000 per day the week prior.
• 63% of the U.S. population is fully vaccinated against COVID-19 and 76% have received at least one dose of a COVID-19 vaccine. For just those 12 years and older, the numbers are 72% and 86% respectively.
• Hospitalization numbers also improved, albeit very slightly.
• COVID-19-related restrictions are being loosened in Europe. Denmark, for example, is ending nearly all of its COVID-19 measures by February 1.

COVID-19 Cases in the U.S.

Source: The New York Times

Tidbits from the News

• Friday, January 21, and Monday, January 24, were the two most active days for options volumes ever. The chart below tracks the notional value of all trading in S&P 500 Index-linked products (ETFs, futures, options). Roughly $1.7 trillion in S&P 500 Index notional exposure was traded on January 24. The previous high-water mark was $1.5 trillion on February 28, 2020. In general, when macro volatility increases on selloffs, market participants move toward highly liquid index products and away from individual names or single stock options.

Daily Index Equivalent Trading of S&P 500 Index-Linked Products

Source: S&P Global Research

• The percentage of the Nasdaq Composite’s 2,500 constituents making new 52-week lows increased dramatically in mid/late January. Technology companies have been hit particularly hard during the recent market selloff. At one point, 42% of the COMP holdings made new lows, which is the highest measure since the height of the COVID-19 swoon and the second highest in 12 years.

Nasdaq Composite New 52-Week Lows

Source: Nasdaq and The Daily Shot

• Cboe’s VIX Index climbed for seven consecutive sessions between January 18 and January 26. The last time that occurred was mid-October 2020 ahead of the U.S. elections. That’s an unusually long streak for the VIX Index, which has had seven consecutive positive sessions 13 times since 1990. Historically, the S&P 500 Index has trended higher following these events. On average, 1-month returns are 3.4% or more.  

Cboe Volatility Index

Source: Cboe LiveVol Pro

The Week Ahead

• Data to be released this week: Chicago Purchasing Managers Index (PMI)on Monday; Manufacturing Purchasing Managers Index (final) and ISM Manufacturing on Tuesday; ADP Employment Report on Wednesday; Initial Jobless Claims, Services Purchasing Managers Index on Thursday; Non-Farm Payrolls and Unemployment Rate on Friday.

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