How lower volatility and cuts in oil production could affect the market…

I am pleased with how the portfolio has formed over the past few weeks. Of our 8 current positions, 6 are winners, one is even and one is a small loser. Several stocks are also in an uptrend. For now, we’re (probably) going to focus on smaller changes like cropping or adding to positions. We’re at about a 70% allocation of our money, which I think is reasonable in this environment. Things can change quickly, of course, but I’m happy with the mix of stocks we currently have in the portfolio. Let’s take a look at what’s going on in the S&P 500 (SPY) week. Read on for more….

(Enjoy this updated version of my weekly commentary originally published June 8e in the POWR Shares Under $10 Newsletter).

Market volatility has really collapsed since debt ceiling fears ended with barely a whimper. It looks like we are going through the summer trading doldrums, when not much is happening in the stock market from a macro perspective.

You can see in the chart above that the SPX (S&P 500 index) has broken the upper barrier of two standard deviations.

That doesn’t necessarily mean stocks are selling out, as the bands are quite narrow due to lower volatility. However, mean reversion is definitely a possibility in the coming days (just because of the law of averages).

Whether the market remains in this low-volatility environment will largely be determined by what the Fed says and does at its June and July FOMC meetings.

We have the June meeting next week and then it won’t be a shock to see a lot of nothing in the markets until after Independence Day.

The market continues to predict a pause in rate hikes for June. The futures market shows a 72.5% chance that the Fed will do nothing about interest rates next week.

The economic data is so mixed that the Fed can probably justify not raising rates (directly). Of course, they can achieve some of their goals by cackling (e.g. by talking the market down).

In July, futures show about a 65% chance of a rate hike. That follows the regular story.

It has become clear that the Fed is not done raising rates just yet. However, at this stage they are not in much of a hurry to walk.

Turning to oil, West Texas crude has been a bit volatile lately. Saudi Arabia announced production cuts and the price of crude oil rose briefly. However, it has fallen back to around $70 a barrel.

Keep an eye on oil as it can be a leading indicator for the economy (and therefore stocks). A price that is too high or too low is generally not good for the stock (for several reasons). However, where we are now in terms of price is pretty much a non-factor.

As mentioned earlier, as seen in the VIX chart below, volatility has collapsed over the past few days. The price is now firmly below 15, which is often considered a low volatility regime.

While we could see a spike in the near term based on the news cycle or the Fed, I expect volatility to remain relatively low.

The summer months are generally slower in terms of realized volatility (the actual movement of stocks). Thus, implied volatility (forward-looking) is also trending downwards. At least that’s part of the reason why the VIX is so low right now.

Let’s take a look at the portfolio.

What to do now?

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All the best!

Jay Soloff
Chief Growth Strategist, StockNews
Editor, POWR Newsletter Stocks Under $10

SPY shares rose $0.19 (+0.04%) in after-hours trading on Friday. Year-to-date, SPY has gained 12.84%, versus a percentage increase of the benchmark S&P 500 index over the same period.

About the author: Jay Soloff

Jay is the lead Options Portfolio Manager at Investors Alley. He is the editor of Options Floor Trader PRO, an investment advisory firm that provides you with professional options trading strategies. Jay was formerly a professional options maker on the floor of the CBOE and has been trading options for over two decades.


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