4-12-16 – Where is the market going?

The S&P 500 is at session highs as the energy sector fuels midday strength Tuesday. While stocks opened only modestly higher, the S&P 500 is now up 15.73 points to 2957.72 and at its best levels of the day.

The Energy (XLE) sector, gaining 2.5%, is leading the advance after crude oil added another $1 to $41.36 on reports that Russia and Saudi Arabia have reached an agreement on production freezes.

Basic Materials (XLB) are seeing relative strength for a second day. Telecomm (IYZ), Healthcare (XLV), and Industrials (XLI) are helping to pace the advance as well. All ten market sectors are in the black.

Meanwhile, gold gave back $2.50 to $1255.50 and, with little economic data to guide trading, Treasury bonds are slipping as equities rally as well. The yield on the benchmark ten-year Treasury is climbing to 1.76% ahead of reports on Retail Sales and inflation (PPI) tomorrow morning.

CBOE Volatility Index (.VIX) is down .90 to 15.36 and options volumes are running about the normal levels. Roughly 3 million calls and 2.8 million puts traded through the first two hours. Projected volume for the day is 14.4 million and in-line with the one-month daily average.

Pfizer (PFE) Jun 28 puts are the most actives with more than 71,000 contracts traded. SPDR 500 Trust (SPY) Apr 203 puts, Apr 204 puts, and 204 calls are the next most actives.

Yet, while trading volumes have been rather light this week and VIX is lower Tuesday, there is a quiet trend unfolding in the options market so far in April. Namely, many volatility barometers are ticking higher after falling to low levels in late-March. For instance, VIX was probing 2016 lows near 13 on April 1st and was above 16.5 earlier today.

At the same time, VVIX, or the volatility index for the VIX, has made a notable move as well. The index was near 80 a couple of weeks ago and approached the mid-90s earlier today (see chart below).

VIX, VVIX and other VIX-like indexes track the implied or expected volatility priced into a strip of options. VIX is the IV for S&P 500 options and VVIX is based on the latest readings derived from VIX options premiums. While the recent uptick in these indexes hasn’t been alarming, it is notable because it suggests that risk or volatility perceptions are on the rise.

While uncertainty on the political and interest rate fronts are certainly factors, the upcoming earnings season is perhaps the main driver for these increased risk perceptions. Alcoa (AA) is down 4.3% today in the wake of its report and Juniper Networks (JNPR) issued an earnings warning. A number of large banks release results over the next few days and then the floodgates on first quarter reports next week.

Zack’s currently expects negative earnings growth in the first and second quarters, but a return to positive growth in the third and fourth quarters. Therefore, it will be imperative that guidance through this earnings season reflects these expectations or volatility is likely to pick up in the weeks ahead.

For now, the S&P 500 has resistance at 2060 and 2067. Short-term support is at 2050 and 2044. With crude oil wagging the dog today, keep an eye on Weekly Inventory Data tomorrow at 11:30 CT. Retail Sales and PPI will set the tone for morning trading prior to the oil data.