2-25-16 – Where is the market going?

After an impressive midday turnaround Wednesday, stocks opened higher and are holding modest gains on light volumes heading into midday Thursday. The S&P 500 is up 2.2 points to 1932 and 7 points off morning highs.

Meanwhile, Treasury bonds are holding gains despite a report that showed a surprise 4.9% jump in January orders for Durable Goods. Economists were expecting an increase of just 2%. Still, the yield on the benchmark Treasury is down to 1.7%, from an intraday high of 1.81% just two days ago.

Crude oil continues to see perplexing price action and is down 90 cents to $31.25. Gold flat at $1239.

On Wall Street, trading is mixed, with six of ten market sectors moving higher. Financials (XLF), Utilities (XLU), and Healthcare (XLV) are seeing the best gains. Energy (XLE) is a notable laggard.

CBOE Volatility Index (.VIX) is unchanged at 20.75 amid very light volumes in the options market. Roughly 2.7 million calls and 2.5 million puts traded across the exchanges through the first two hours. Expected volume for the day is just 11.5 million contracts and 30% below the one-month daily average.

XLF Mar 21 puts are the most actives of the day after more than 150K contracts changed hands. Transocean (RIG) Mar 7 puts, Marathon Petroleum (MPC) Jul 45 calls, and VIX Mar 30 calls are the next most actives.

Indeed, VIX March 30 calls have been among the most actives throughout the week, as players in the index market don’t seem fully convinced that the recent decline in volatility is part of a larger trend. More than 47K contracts were opened at that strike yesterday, with notable VIX Mar 30 – 35 call spreads driving much of the action.

The interest in upside calls and call spreads on the volatility index comes after a solid rebound in the S&P 500, which has now rallied 5.6% in the past two weeks. One catalyst has been the rebound in crude oil.

Yet, crude is behaving in random fashion from one day to the next and the recent rally in overseas equities markets is already sputtering, with Europe down sharply yesterday and China’s Shanghai Composite taking a 6.4% dive on “liquidity” concerns today.

Meanwhile, Federal Reserve’s John Williams is out reiterating Thursday that the Fed remains data dependent and would like to raise rates slowly. That reminder comes ahead of a flood of economic data in the weeks ahead, including jobs numbers next Friday. Needless to say, upcoming data will set expectations for the March 16 FOMC meeting – which, incidentally, takes place the same day that the March 30 calls on the volatility expire (VIX options expire on Wednesday’s).

On the technical front, today’s lackluster trading session seems to be a non-event, but comes after an encouraging midday turnaround Wednesday. The S&P 500 held the 1890 level, blew through 1900, and finished nearly 40 points from session lows. Today’s highs of 1940 are resistance, as is the 1945-47 range, which corresponds to February highs from 2/1. A more encouraging sign would be a break of 2,000, but that’s a long way off still. Downside support is likely at 1925, 1920, and yesterday’s low of 1890.

Keep an eye on crude, as it is the tail wagging the dog lately. The drop in bond yields (TNX index) reflects the anxiety on the global economic front and watch those March 30 calls for signs that the institutional crowd is bracing for increased market volatility into the 3/16 Fed meeting.