The Bear Steepener Could Be Ready To Resume

Stocks finished the day higher, with the Fed meeting scheduled for tomorrow. The S&P 500 gained around 90%. Technology names bounced back today, while the S&P 500 Equal Weight ETF RSP moved lower by about 50, giving back some of yesterday's gains.

The RSP remains around resistance at the 61.8% retracement level, which would continue to suggest that the recent rally in the equal-weight sector appears to be a rebound until the ETF breaks out and moves higher.

Tomorrow's Fed meeting will significantly affect where rates go and whether the yield curve steepens. If the Fed signals that it will not be cutting interest rates further, at least over the near term, I would think that we would likely see the yield curve steepen further. It is possible to say that the 10/2 curve has formed a flag pattern and that the next big move will be for it to rise further in the form of a bear steepener.

Of course, much of what happens following tomorrow's Fed meeting has much more to do with implied volatility levels than that of the decision itself. The VIX 1-Day trades around 13, a reasonably low level 1 day ahead of the Fed. Unless it rises sharply tomorrow in the lead-up to that meeting, the S&P 500 will likely have a muted move post-FOMC and is vulnerable to move lower should Powell come across as more hawkish. Given IV is so low, should the Fed surprise the market and come across as more hawkish, implied volatility could spike.

Additionally, we saw the VIX also move lower today, allowing the implied correlation to drop. Again, the 1-month implied correlation index is at a low value of just 8, and there is the risk that once we get past earnings later this week, this index could start to rise as implied volatility resets. Historically, low reading in the implied correlation can be associated with short-term market tops.

-Mike

Term By ChatGPT:

1. S&P 500: A stock market index tracking the performance of 500 of the largest publicly traded companies in the U.S.

2. S&P 500 Equal Weight ETF (RSP): An exchange-traded fund that gives equal weighting to all stocks in the S&P 500, as opposed to weighting by market capitalization.

3. 61.8% Retracement Level: A technical analysis term referring to a Fibonacci retracement level, often used to identify support or resistance levels.

4. Yield Curve: A graph that plots interest rates of bonds with different maturity dates.

5. 10/2 Curve: The yield spread between the 10-year and 2-year Treasury bonds, often used as a signal for economic conditions.

6. Bear Steepener: A situation where long-term interest rates rise faster than short-term rates, steepening the yield curve and potentially signaling inflationary expectations.

7. Implied Volatility (IV): A measure of expected market volatility derived from options prices.

8. VIX: The “Volatility Index,” often referred to as the market’s fear gauge, which measures expected 30-day volatility of the S&P 500.

9. Implied Correlation Index: An index that measures the average correlation of S&P 500 stocks, often linked to market risk sentiment.

10. FOMC (Federal Open Market Committee): The branch of the Federal Reserve responsible for setting monetary policy, including interest rates.

11. Hawkish: A stance by the Federal Reserve favoring tighter monetary policy, typically involving higher interest rates to curb inflation.

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