Market resilience

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Key points to remember

  • Markets reversed their losses on Wednesday
  • Interest rates go down
  • Volatility remains high

Wednesday morning was shaping up to be a bit gloomy as markets were down across the board. By the time we closed; however, markets were largely flat for the day. While a gain of nothing might not sound particularly exciting, the fact that the markets were able to erase the early losses was encouraging. During the night session, we saw similar action. S&P 500 futures, which had fallen as low as 3,735, turned as overseas markets opened and are higher in early trading.

In what has been a tough market lately, these types of reversals offer some optimism. It’s also worth noting that volatility, which was recently as high as 35 on an intraday basis, is now below 30. That’s not to say that markets are signaling a clear cut, but it’s worth noting when sellers break run out of steam and volatility contracts.

On the Treasury market, bonds recorded a nice recovery. 30-year bond yields are currently at 3.22% after hitting a high of 3.46%, while 10-year bonds are now trading at 3.13%. Last week, the Fed announced a 75 basis point interest rate hike and signaled its willingness to do whatever is necessary to contain inflation. The fact that we are actually seeing a rate cut could indicate that the market is less concerned about the aggressiveness of these future hikes. Today is also the conclusion of Fed Chairman Powell’s two-day testimony to Congress and markets will likely analyze his testimony for any clues to the Fed’s future plans.

While these are all encouraging signs, we must remember that the VIX is still elevated relative to its historical average. Therefore, the potential for continued choppy trading still exists. It is always important to stick to your game plan and stay mechanical with trading decisions. When emotions begin to dominate decisions, that’s when risk increases.

commentary by tastetrade, Inc. for educational purposes only.

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