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Confidence and Defaults.

May 15, 2023

Charts: Premarket

What's Happening Now in the Markets

Some key takeaways from the Market last week:

US Equities dipped on Friday on the heels of weaker than expected economic data, with some key consumer health metrics reaching lows last seen in November.

The rolling regional banking crisis continued as well, sending select regional banking names lower by double digits on the week.

Inflation eased just a touch, easing down to 4.9% versus the 5% print from the month before.

Across the pond, the Bank of England increased its key interest rate by 25 basis points. This translates to 12 consecutive rate increases as the UK continues to battle an inflation rate that was the highest among the G7 Nations as recently as march.

As we go into a heavy retail earnings week (Walmart, Home Depot, and Target), the highlight from last week came from the House of Mouse. Disney missed on earnings. The house of Mouse despite losses from its streaming sector improving. Strong showings from parks, experiences, and products weren't enough to counteract the falling profitability of its traditional TV business.

On Tuesday we'll take a look at April retail sales—a proxy for consumer spending habits—and we'll also receive the critical data on the housing market from the NAHB and Census Bureau this week.

At current prices, the S&P 500 is now in the same spot it sat in February. Over the last month, the key index has been stuck in a narrow 2% band.

The market's fear gauge—the VIX—remains subdued, closing at 17.03 on Friday. Anything below a reading of 20 signals calm, complacent markets:

Source: IVolLive
(Source: IVolLive)

As you can see in this one-month chart of the market's fear gauge, the VIX, as price (the blue line) has fallen, implied volatility (green line) and historical volatility (orange line) have leveled off.

This also means that option premiums are relatively low. Buying insurance or hedges, or going long volatility, is relatively cheap at the moment.

Bottom line: despite shakeups in the regional banking sector and persistently high inflation, the VIX remains relatively low. Now could be a great time to hedge or make plays on select long plays thanks to cheaper option premiums.

How to Play It

With implied volatility and price falling in synch on the VIX, this signals that options premiums will be falling. This means now could be a good time to go long options, or long volatility.

Interesting opportunities:

• Retail: In general, despite banking jitters and high inflation, the consumer has remained resilient. We're looking for overdone selloffs in select retail names that cater to middle class American consumers.

• While volatility is low at the moment, hedging one's portfolio could be wise as periods of low volatility are always followed by spiked in the VIX. That's how markets work.

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