Possible "local" peak in VIX raises probability of rally on Friday post-Aug jobs report

Possible local peak in VIX raises probability of rally on Friday post-Aug jobs report
Possible local peak in VIX raises probability of rally on Friday post-Aug jobs report
Possible local peak in VIX raises probability of rally on Friday post-Aug jobs report

On Friday, August jobs report is released at 8:30am ET, the first of 3 key Sept macro events (CPI next week, FOMC week after). For reasons discussed below, we believe there is a high probability of a rally post-Jobs report.

  • Foremost, we believe we saw a possible “local” top in the VIX, which surged to 23 this week. Currently, the VIX stands at 20 but the key is the term structure inversion:
    – the peak of the inversion was Tuesday at -0.50
    – currently at -0.04 and could flip positive today
  • As shown below, since 2022, the peak inversion of the VIX has marked a tradeable bottom in stocks. Thus, this local top corresponds to the local bottom taking place now.
  • Second, the incoming jobs data this week points to an “OK” jobs market and less likely one that is “too hot”:
    – a too hot report (>200k) likely triggers fears Fed backpeddles on cuts
    – any figure 200k or less is considered a middle road and positive
    – a too weak figure below 100k is also not ideal
  • But odds favor a figure between 100k to 200k and this would be likely to be seen positively for a “soft landing” scenario. And we are likely in a situation where good news economically is good news for stocks. Just as long as it is not too good.
  • Third, history suggests a rally Friday.
    – Since 1928, when S&P 500 is down -1.5% or worse on first day of Sept (n=10)
    – S&P 500 gains from day 2 to day 5 an average of +0.80%
    – win-ratio is 80%
    – This implies S&P 500 5,600 or so
  • Fourth, I cannot really point to any fundamental reason for stocks to be this weak to start September. Sure, the next 8 weeks will be challenging.
    – but as we noted last month, the most common month for stocks to bottom
    – during election years
    – is August, 46% of the time
  • Thus, we see the August lows as holding.

Bottom line: This is just a probability assessment, but we see highest probability for a rally Friday

Plus, we think investors have gotten overly gloomy. Granted, the yen is falling, so this is probably adding to the misery.

Possible local peak in VIX raises probability of rally on Friday post-Aug jobs report

Possible local peak in VIX raises probability of rally on Friday post-Aug jobs report

Possible local peak in VIX raises probability of rally on Friday post-Aug jobs report

Possible local peak in VIX raises probability of rally on Friday post-Aug jobs report

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