Earnings Season Will Reduce Volatility

The CBOE Volatility Index is a gauge of the S&P 500 Index’s implied volatility.

The volatility index has been running below the 10-day realized volatility of the benchmark for nearly three weeks.  One reason is that the #earnings season has just gotten underway.  It is expected to serve as a salve for jittery markets.

Specifically, the weekly traders report from the CFTC shows non-commercial position in VIX volatility futures rose to a record net long as of April 10.  This indicates unrelenting bets on continued market turmoil.  However, this is a contrarian signal for investors who hope that earnings will bring about a relatively more calm backdrop for equities.

“The VIX has started becoming unresponsive to equity market pullbacks.  Furthermore, the net positioning in VIX futures is very stretched.  And it has reached levels that have historically made market bottoms.” This according to EIA All Weather Partners Chief Macro Strategist Naufal Sanaullah.  “At present, we believe the market has a strong setup for climbing the ‘wall of worry.’

Christopher Harvey is Wells Fargo Securities head of U.S. equity strategy.  He observed that even firms that have reported better-than-expected sales or profits have underperformed the market as a whole.  It seems that it takes more to wow investors this time around.  In addition, investors know that past performance is no guarantee of future results.

As a result, “as earning season progresses, we expect volatility to decay with the increased certainty and understanding of corporate fundamentals.”

Nevertheless, this market is not without skeptics.  Investor David Tice manages a bear market fund.  He warns that this market is “pretty dangerous” right now.  His principal concerns are Federal Reserve policy and geopolitical risks.

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