As if anyone needed another example of who is really running the show, the S&P 500 cash index (an index that tracks the weighted performance of 500 underlying and supposedly fundamentally idiosyncratic companies) closed at 1399.99 after breaching the almighty 1400 earlier in the afternoon. The Dow Industrials failed to close in the green for the month and Dow Transports notably diverged bearishly today as the afternoon's ramp-fest in equities - and notably nothing else - gave hope to hope-less. Between a weak/strong (you decide) jobless claims data, a dismal Kansas Fed (and Chicago NAI negative print) juxtaposed with what was 'supposedly' strong pending home sales (contracts not signings note), it seemed some early QE-hope spillover from Bernanke yesterday got us going (with gold outperforming) early on but as the US day-session began, stocks took off from their lows, stabilized into the European close, then re-accelerated - running stops to the early April non-farm-payroll print levels. Stocks reconnected with Gold's early run but this did not have the feel of a QE trade at all - the USD was flat all afternoon, volume was dismal, gold actually fell as stocks took off this afternoon, and Treasury yields rose and fell in a narrow range. In other words, there was not a concerted cross-asset class QE hope here - this was all stocks on their own - as they disconnected from our cross-capital structure and broad risk asset models as the afternoon wore on. Notably SPY implied vol is very close to crossing below its 20-day realized vol for the first time in almost five-months as VIX tested under 16% but couldn't maintain it into the close. The USD was lower close-to-close with AUD strength and JPY weakness most obvious as the US day session began with EUR relatively stable. Treasuries broadly remain lower in yield on the week with 7Y outperforming and 30Y basically unch. Copper was the best performing commodity today followed by Silver (though Ag remains down on the week) but Gold and Oil also benefited from USD's leaking. Discretionary, Energy, and Financials sectors outperformed on the day in stocks (with Materials weak - another non-QE sign) but it was the equity market's standalone bullishness that suggests this was more technical than a hope- or fundamental-based regime shift.
US equity indices remain lower still for the month. The Dow was green for the month for a while but lost it into the close and significantly diverged from Transports. The NASDAQ is playing catch up still but it is the perfection in the S&P 500 at 1399.99 that made our day. Long-live the algos...
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VIX tested below 16% today but ended above it but we note that 3m SPY implied vol is getting very close to testing below its 20d realized vol - something we have not seen in almost 5 months...
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And with a h/t to John Lohman, the following chart gives a sense for what happens when the VIX crosses below SPY's 20-day realized vol. (though we note average returns after this cross are negative - SPY drops - though median returns are not - the performance is skewed notably). Still interesting how 'cheap' vol has got again...
[7]
The equity rally this afternoon (as we noted earlier) seemed to be a run on stops at the pre-NFP close as opposed to any fundamental buying. As is clear below, the rest of the asset classes were dramatically unimpressed...
[8]
Judging how markets did relative to one another is tough but as the chart above shows, gold tended to outperform early and Treasuries ended near their best (lowest yields) of the day. While correlations broke-down this afternoon, the S&P 500 disconnected significantly from both the credit/rates/vol model (SPY vs HYG/TLT/VXX) on the left (below) and CONTEXT (the broad risk-asset proxy for equity risk sentiment) on the right below...
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and on a longer-term basis, CONTEXT has once again turned down in the same range as stocks have diverged - will this time be different? QE will tend to break correlations and so perhaps that is what we saw today but the correlations we would expect as QE was traded did not appear...
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Charts: Bloomberg