CBOE SPX Volatility Index (VIX.I) & iShares 20+ Year US Treasury Bond ETF (TLT)

August through October has historically been the weakest and most volatile time of the year for stocks. The equity market rally which had been slowing into the latter part of July, appears to have reached a tipping point right on its seasonal schedule.

Investor sentiment was sternly shaken by the news that Fitch Ratings cut its long-term default rating on US government debt to AA+ from AAA, following up on a warning it had issued back in May. The agency blamed deteriorating standards of fiscal governance and the brinksmanship around the debt ceiling for the downgrade.

On this news, the US 10-year treasury note yield jumped back above 4.00%, sparking a rally in the US Dollar, and adding a potential headwind for equities. Major indices sold off around the world yesterday with the S&P 500, NASDAQ, Nikkei, Hang Seng and FTSE all losing more than 1% in a day, and some of these dropping more than 2%. Although the overall tone was broadly negative there were some notable differences in performance. At the country level, emerging markets and resource sensitive countries tended to be hit the hardest. On a North American sector basis Technology, Communications and Materials were hit harder than the defensive or depressed Health Care, Consumer Staples, Real Estate or Financials groups. The majority of index and sector charts showed 3-box reversals at worst from yesterday and most charts remained on bullish signals but this could change if the selloff deepens in the coming days. Reaction to earnings reports has continued to be mixed, even though results have remained generally positive, reflecting differing expectations heading into the news. After reports from Apple, AirBnB, and Amazon.com tonight, earnings season for big cap stocks in the US winds down and the focus shifts to a larger number but less individually impactful range of small and mid cap stocks. Canada continues to move through the heart of its earnings season headlined by the big Telcos, big Insurance companies, Utilities, Miners, and Industrials.

Economic news continues to roll out this week. ADP payrolls came in well above expectations, setting the stage for tomorrow’s US Nonfarm Payrolls and Canada jobs reports. Focus then turns back to inflation starting with wage reports tomorrow and continuing next week with consumer and producer price reports for the US and China next week. In this edition of Equity Leaders Weekly, we look at the VIX and bond prices for insight into changes in investor sentiment.

The CBOE Volatility Index (VIX.I) also known as “The VIX”, is a measure of the implied volatility in the pricing of S&P 100 Index Options. A rising VIX is considered to be a sign of growing fear and a falling VIX a sign of growing confidence.



In the June 22nd edition of Equity Leaders Weekly, we highlighted a falling VIX as a sign of improving investor confidence, supporting growing breadth as a sign of a bull market in equities.

In the last month, however, VIX.I appears to have bottomed out near 13.00 and yesterday it started to turn back upward, completing bullish Double Top and Spread Double Top patterns. So far, this upswing appears to be a normal correction within a broader downtrend. It would take a move back above 20.25, which would snap a downtrend line and clear previous highs, to raise significant concern and signal that a deeper decline or a period of higher volatility may be getting started.

On the other hand a 3-box rolldown back under 14.75, would signal that fear is starting to fade with the next downside test near 13.00.

Mirroring a major trend change in interest rates, the iShares 20+ Year US Treasury Bond ETF (TLT) peaked in August of 2020, then sold off dramatically through to October of 2022 as central banks embarked on a major monetary tightening program in order to combat inflation.

As investors started to see the light at the end of the tunnel for the current round of rate hikes, traded interest rates backed off, and TLT bounced back along with global stock markets. For TLT, the rally ran out of gas in April, and for the last three months, TLT has been quietly backsliding as treasury yields have crept upward as sticky inflation and a strong North American economy suggested interest rates could remain higher for longer. This week, the sideways trend for bonds and interest rates hit a tipping point with the Fitch US credit rating downgrade. The US 10-Year Treasury Note Yield (TNX.I) has rallied back above 4.00%, and TLT has turned decisively back downward, completing bearish Triple Bottom and Spread Double Bottom breakdowns.

Downside support for TLT appears near $94.50 and $89.90 based on previous column highs and lows. Initial resistance on a rebound appears near the $100.00 round number, then $101.30 based on a 3-box reversal.