The market is getting two different, competing messages: We’re going to pull off the soft landing or a recession is certain to hit.

 I last saw it on a Contrarian blog, but it’s mainstream, too; you can hear it from CEOs like Bank of America’s Brian Moynihan and Citigroup’s Jane Fraser and all over the earnings calls kicking off at the moment. 

I can’t really blame investors for being confused about it. And investors are confused – I’m going to show you a chart in just a second that shows just how mixed-up they really are.

But, as is, The Fed has made it clear it won’t stop hiking interest rates until inflation gets down to 5% or lower. 

Despite all of that, we still have a resilient market that’s thinking we’re not going to have a problem on the horizon.

That’s causing some confusion right now in all different areas of the market.

One of those is the Chicago Board Options Exchange’s CBOE Volatility Index (VIX), a.k.a. the Fear Index…

We saw the VIX break below 20 last week, the first time below that mark since August and April 2022.

In August. It dropped below 20 for three or four days before shooting back up to 26, 27, and eventually 28.

In April, it got down in 18 levels before it jumped back up to 25. It dropped back down again to 20 for a couple of days and then took off. Each one of these instances saw more than 10% drops in the market on the other side of that trough.

But we could be in that situation right now where if a decent set of earnings comes out, we could see the VIX drop.

Now, this matters because we’re all trying to pinpoint the true bottom of the market – and sentiment plays a key role.

The market is never going to “go to the moon” if the VIX is sitting steady at 25.

So, that break below 20 is interesting. As you can see on the bottom right of the above chart, we also broke below the bottom Bollinger Band.

That’s why the aforementioned confusion is something I can’t shake from my mind.

On one hand, it feels like you’ve got half of the people betting on the VIX reaching 15, while the other half are betting on 25.

The thing is, even if there’s a higher likelihood of it hitting 25 than 15 in my opinion, there’s just not a lot on the calendar in the next couple weeks that has the potential to send fear skyrocketing.

I get it, we’re set to get the PPI number and retail sales tomorrow morning at 8:30, and then there’s also industrial production. While that’s normally not something people look at, it’s actually become more of a thing over the last couple of months as people worry about whether production’s going higher or lower with these slowdowns.

It really speaks to the confusion people are feeling about whether we’ll sink into recession or get that soft landing.

But those aren’t a Fed announcement. Those aren’t the earnings announcements of major tech companies.

We saw an elevated VIX level for the past couple of weeks with a Fed meeting, the CPI announcement, and the jobs report. The reason is because those are all things that move the S&P 500.

The stuff on the calendar up until the week of Feb 2, when we’re set for our next Fed meeting, is all impactful on a sector-by-sector level, but not the entire S&P or NASDAQ.

We don’t have any really juicy earnings announcements this week until Thursday with Netflix, Inc. (NFLX).

All things considered, this is a pretty boring week – and that feeds into the VIX staying low. There’s nothing with any shockwave potential for the broader market.

We’ve got to get to the point where we’ll have two or three days in a row where all eyes are on CNBC at 4:05 p.m., eagerly awaiting the earnings announcements for giant, consequential companies.

Those are the types of days where we’ll see the VIX go up because people are on high alert about potential market-moving announcements.

That is not this week.

I’m not expecting that until February 2. Apple Inc (AAPL), Amazon.com, Inc. (AMZN), Meta Platforms Inc (META), Eli Lilly and Co (LLY), Merck & Co Inc (MRK). All of these are coming the week of February 2. That’s a busy week – that’s a week that can stoke fear.

I get it, Microsoft is huge and has an impact. But you need three or four Microsofts announcing earnings on the same day to start having an impact on the VIX.

I expect the confusion to clear up in the first week of February, when 40% of the NASDAQ by weight reports earnings.

In fact, for tomorrow morning’s show, I’ll throw together a chart that shows which dates carry the most weight of the NASDAQ or S&P announcing. That should be a useful tool as we move through 2023, because those are going to be the days when we’ll see the VIX jump higher.

The point of all of this is to say, we’re not going to be making any trades predicting a market breakout or breakdown until that first week of February at the earliest.

But the lack of shockwave-worthy events on the calendar doesn’t preclude us from finding trades.

There are going to be plenty of chances to trade individual companies making earnings announcements, as well as, to a lesser extent, different sectors.

Because of there being fewer events of consequence in the next two weeks, you can expect some trades from me at the individual stock level on account of the decreased volatility.

And on the sector level, while the overall market is insulated from individual earnings announcements, there are clumps of companies within given sectors that could set up movements.

So if we get PNC and Huntington reporting earnings that underwhelm, you’re going to see a breakdown in SPDR S&P Regional Banking ETF (KRE) and SPDR S&P Bank ETF (KBE). That’s the type of thing that will be tradeable at both the individual stock and the sector level.

A subdued effect on the markets, but an acute effect on the ETFs, if you will.

Until that string of days at the start of February, we’ll be monitoring that activity and finding some good trades to place in the interim.

Tune into the show tomorrow morning to see those steps in action.


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