Looking to the Futures

October 27, 2020

2 minute read

Volatility Pushing Higher

by Chris Waterbury, Derivatives Manager, Charles Schwab & Company

Volatility spiked yesterday as uncertainty around a timely stimulus package increases. European stocks fell Monday increasing selling pressure in U.S. equity markets. Economic data released yesterday came in mixed. What appears to be a fairly positive earnings season thus far has proved unable to prop up equity markets. Additional steps are being taken in Europe to bolster the spread of COVID-19.

Major Indexes traded lower yesterday as the markets are skeptic of a timely stimulus package. It appears a major roadblock for a new relief package is the amount of funding for state and local governments. White House economic director reported yesterday that President Trump is not willing to accept the current Democratic Stimulus Bill, which pushed markets lower and increased volatility.

European stocks saw losses Monday as COVID-19 concerns rise and tech stocks took significant selling pressure. SAP Se, one of Europe’s largest tech companies, fell over 2% during trading Monday after an unexpected cut in its revenue forecast.

U.S. economic data released yesterday provided little optimism for equity markets. Sep new home sales fell -3.5% to 959,000 missing the expected +1.4 increased to 1.025 million. U.S. Sep Chicago Fed national activity fell -0.84 to 0.27, lower than the expected 0.73 mark. The Oct Dallas Fed manufacturing activity did rise +6.2 to 19.8, beating the expected -0.1 decrease to 13.5.

We are amidst the heart of earning season and the market has been unable to hold in what many consider better than expected earnings announcements. Today 3M, Pfizer, and Caterpillar beat expectations with Eli-Lilly missing. LLY reported significant costs related to vaccine efforts which could account for a portion of the reported lower-than-expected revenue data.

As COVID-19 cases rise, uncertainty is being pumped into the equity markets. U.S. COVID-19 infections increased to a daily record of 85,317 on Sunday in what the World Health Organization referred to as a, “dangerous moment.” New cases in Italy rose by 21,273 on Sunday causing a month long set of restrictions by the Italian government. Spain has implemented a national curfew after announcing a state of emergency which Prime Minister Sanchez would like extended into May of next year.

Technicals:

Looking at the daily chart for the Volatility Index November 2020, VXX20 contract we can see the significant buying pressure to start the week. VXX20 was able to break through to 20-Day, 50-day, and 200-Day Simple Moving Averages during Monday’s trading. The 50-day SMA could provide an important support level if the contract is going to trade in a higher range.

According to the CFTC Commitment of Traders report released October 20^th, Non-Commercial traders increased their long position by 3,579 contracts and increased their short position by 8,932 contracts. Non-Commercial traders are net short 107,292 contracts.

Looking at the daily chart for the VXX20 contract we can see support levels at 28.50 and 28.00 with resistance levels at 33.00 and 33.50.

The 14-Day Relative Strength Index at 54.24% does not indicate overbought but with the heaving buying pressure over the past two trading sessions that number may be subject to increase.