This morning’s release of the non-farm payrolls report is likely to cause a big move in the stock market.
That shouldn’t be too much of a surprise. The market is often volatile following the monthly jobs report. This month, though, stocks seem to be set up for a much larger move.
You see, for the past two weeks the S&P 500 has been stuck near the 4200 level.
Oh sure, we’ve been a little bit higher and a little bit lower. For the most part, though, the index hasn’t done anything for two weeks.
So, there’s lots of energy stored up to fuel a big move…
Look at this 15-minute chart of the S&P 500…
After a great deal of volatility during the first three weeks of May, the index has been range-bound for the past two weeks. It needs some sort of catalyst to break out of this range, and I suspect today’s jobs report will do the trick.
The question, of course is… Which way will it go?
The crystal ball says we’ll go lower from here.
Let me explain…
Long-time readers know about the predictive power of VIX option prices. We’ve used extreme deviations in option prices before as a sort of “crystal ball” for the immediate direction of the stock market.
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In fact, the last time we peered into the crystal ball was in late January. VIX option prices were warning of an impending decline. One week later the S&P 500 was 150 points lower.
We have the same sort of setup today…
On Wednesday, the VIX closed at 17.50. At that level, the VIX June 16 $18 puts were $0.50 in the money. And, they were trading for $1.00.
At the same time, the VIX June 16 $18 calls were $0.50 out of the money. Yet they were trading for $2.00.
In other words, traders were willing to pay 100% more for a VIX call option that was out of the money than for a VIX put option that was $0.50 in the money. This tells us that traders who are making bets on the VIX expect the index to move higher over the next two weeks.
This sentiment is even more evident if we go out a little further and compare the VIX July 21 $18 calls with the VIX July 21 $18 puts. The calls closed Wednesday at $4.40, while the puts were only $1.25.
VIX calls are far more expensive than the equivalent put options.
Traders clearly expect the index to move sharply higher between now and late July. And, a rising VIX usually goes along with a falling stock market.
And, today’s jobs report could be the catalyst that sets that decline in motion.
Best regards and good trading,
Jeff Clark
P.S. Every week, my colleague Eoin Treacy takes some time to share his musings on the current goings-on in the markets. So far, he’s discussed the rally in gold, bitcoin, and inflation.
Today, he’s sharing more on what’s been going on this week. So, click down below to hear Eoin’s thoughts.
Eoin’s Insights
Happy Friday Market Minute readers. Here’s another short clip of my weekly series where I talk about what’s happening in the markets.
Join me today as I talk about what the Fed is doing, the dollar, and a potential answer to where the next round of stimulus will come from. Just click below to watch.
Reader Mailbag
Do you agree with Jeff’s prediction that the jobs report will cause a move lower, or do you think it could move in another direction?
Let us know your thoughts – and any questions you have – at [email protected].