ESS Webinar Series Replays: We are excited to bring you replays of each of the Enhanced Security Selection (ESS) package webinars that we have conducted over the past four weeks. These webinars provide some background information on the tools you get with the ESS package and offer potential implementation ideas to put these tools to work. Each webinar is approximately an hour long. Please see the breakdown of topics and their respective video replays listed below.

• May 7^th - The Matrix tool & Models
• May 14^th - Fund Scores & Asset Class Group Scores
• May 22^nd - FSM Models
• May 28^th - Team Builder

Market Webinar Replay: We also have a video replay and slides available from our lastest Market Update Webinar from Monday, June 1^st:

• Video replay found here
• Slides found here

Beginners Series Webinar - Join us on Friday, June 5^th at 2 PM (ET) for our NDW Beginners Series Webinar. This week's topic is Reading a Point & Figure Chart. Register here.

Just like that, we’re back. Intraday action on Thursday pushed the Nasdaq 100 Index NDX to an all-time chart high at 9740. Since posting a bottom at the end of March, NDX has rallied over 38%, contributing to an astounding year-to-date return north of 11% (data from 3/23 - 6/3). As recently highlighted, the overwhelming strength from the large-cap growth (technology and friends in particular) camp continues to be evident here. Comparatively speaking, the S&P 500 SPX has rallied over 39% since March 23rd while the Dow Jones Industrial Average DJIA has rebounded over 41%; however, NDX is the only major equity index of the three with positive year-to-date returns, as SPX and DJIA trail at -3.34% and -7.95%, respectively (as of 6/3).

The findings above and those similarly discussed in yesterday's Weekly DALI &US Equity Overview (which can be accessed here) speak to the velocity of the equity markets’ recent movement, to the downside and upside. From the previously linked research piece, it took the S&P just 16 days to rally 20% off the March 23rd low! In looking back at all the major bottoms in the market, the average length of time before rallying 20% is 84 days or nearly three months, a far cry from 16 days. As we stand today (6/4), the S&P 500 and Nasdaq 100 default charts have successfully returned to a positive trend, while the DJIA still has some work to do. Those looking to monitor these charts for further action should make sure to use the "Set Alert" button at the top of each chart.

The CBOE S&P 500 Volatility Index VIX, which is often referred to as the ‘fear index’ is a measure of uncertainty or volatility in the US equity market. The VIX uses data from S&P 500 index options to project the expected volatility in the market as an annualized figure. So, when the VIX reached 85 in March amid the COVID19-induced sell-off, it implied an annualized volatility level of 85% and during that period we saw some of the most volatile trading days on record. Although the VIX is often referred to as the fear index, a high VIX is not bearish in and of itself. The index gauges expected volatility in either direction, up or down, as we have experienced over the last two months as the market has rallied strongly while the VIX has remained elevated. Of course, the VIX is a volatility expectation, it does not actually determine the level of volatility that is ultimately realized.  Although market makers do use the VIX as input when analyzing how much liquidity to provide to the market, so we can’t say that it has no effect on actual volatility.

In any case, the heightened levels of volatility this year and the fact that the VIX remains above its long-term average made us curious how accurate the VIX estimate was in predicting the actual level of realized volatility. To answer this question, we looked at the daily VIX levels since the beginning of 2004 (when the index calculation was changed) and compared them to the daily movement of the S&P 500. As mentioned above, the VIX is an annualized number, so to convert it to a daily number we divided by the square root of 252 (the number of trading days in a year). We then compared the daily VIX number (from the prior’s day close) to the daily return of the S&P 500 (absolute value) and the day’s range ((high-low)/previous close). It is worth noting that the VIX is actually an estimate of expected 30-day volatility, but, the daily conversion we’ve described above is regularly used by traders and other market participants as a rule of thumb for gauging the magnitude of daily market moves. If you regularly watch CNBC or Bloomberg TV, on multiple occasions you have probably heard something like “the VIX is currently at 30, which implies a daily move of about 2%.”

As the table above shows, since 2004, the VIX has had an average level of 18.6, which implies daily volatility of around 1.17%. which is 0.41% greater than the average daily move of the S&P 500. Interestingly, compared to the average daily range of the S&P 500, the VIX is almost spot on, undershooting by just 4 basis points (0.04%). We can also see that just over 80% of the time the daily VIX conversion less the actual daily move is positive, meaning that it overshoots the daily change in the index fairly consistently. Looking at the daily range comparison we see that even though the average difference is slightly negative, just the figure is positive 59% of the time, meaning that it also most often overestimates the daily range of the S&P 500. So, while the VIX is certainly a useful tool for judging the overall level of volatility we may encounter in the market, it tends to overestimate the actual movement of the S&P 500 on any given day.

The Money Market Percentile Rank (MMPR) has continued to decline over the past week, falling to a recent posting of 27.46%. As a refresher, this reading tracks the relative position of the US money market group against the rest of the groups on the Asset Class Group Scores (ACGS) system, and we have now seen the reading fall below 30% for the first time since it began to rise in early March. Interestingly enough, we can also see that the MMPR never sat in the 30s during its ascent, jumping from a level of 23% to 47% on March 12^th. This exemplifies the swift moves this reading is capable of, and while we have yet to see a drastic tick to the downside, that is certainly something to keep an eye out for as we continue to see the level drop.

One point we have continued to monitor in the recent movement of the MMPR has been what groups have moved above the US money market group, as the actual average score of the group has declined but continued to show rather muted score changes. The past few days have seen some notable improvement in unfavorable areas, with MLPs advancing ahead of US money market. The bulk of other groups that have risen above money market come from foreign equity classifications, as we have seen the all global & international diversified, international small-cap, and global developed markets groups push higher towards the 2.50 score threshold. This indicates a continuing broadening of improvement across foreign equities, following the increased participation we have seen in US markets.

The top of the ACGS rankings continues to be dominated by domestic equity-focused areas, as there are now 10 such groups that score above the sought-after 4 score line. One of the more surprising areas that have seen improvement has been convertible bonds, which rose into above the blue threshold this week with a recent average score posting of 4.04. Convertible bonds tend to be more correlated to equity movement given their structure, however, it is certainly noteworthy to see such significant improvement from a more defensively-minded group on the backs of broadening strength in domestic equities. The recent score posting of the group actually marks its highest level since November of 2010, when the group saw an average score above 4.00 for about a month before moving back south. This will also be an area to monitor as we move towards the halfway point of the year, especially given its current overbought status created by the recent price rally.

Daily Option Ideas for June 4, 2020