Morning Preview: Is the Sideways Grind Beginning?

The S&P 500 is coming off 5 all-time highs in 5 days, but we may be in for a sideways grind.

On Friday, I wrote that the market was ‘feeling' stretched but sentiment was mixed, which is typically a recipe for a whole lotta nothing in terms of action.

I would not be surpised to see the market stay range-bound, similar to what we saw in the April-May snoozefest.

Earnings are giving traders an excuse to take profits.

We started off Q2 earnings season on high notes from Alcoa (AA) and JP Morgan, but we ended the week with unimpressive earnings numbers from names like Wells Fargo (WFC), Citigroup (C), and Swatch.

I'd watch to see how Bank of America (BAC) gets treated this morning. It beat EPS estimates, but it's up only fractionally in the early going.

We also saw a miss an earnings this morning from transportation name JB Hunt (JBHT).

European markets are down slightly today following the failed coup attempt in Turkey, though safety assets like gold, the yen, and US Treasuries are selling off.

On the deal front, SoftBank of buying ARM Holdings (ARMH) for $32 billion, or a  ARM is a chip designer that licenses its IP portfolio to virtually all mobile device makers.

The SMH ETF is up about 1.4% in premarket trading. ARMH comprises 4.7% of SMH.

ARMH is up 43% this morning, which is going to burn all the bears that sent its short interest to 6-year highs.

SPX futures are modestly positive this morning, but well off pre-market highs. Again, how Bank of America gets treated will probably be a tell.

We don't have any market-moving economic data reports on tap.

Now, even though I think the market's likely to go sideways for a bit, I suspect we're going to see a strong increase in the VIX within the next week or two.

Remember what the VIX is — the market's expectations of 30-day volatility, as measured by SPX options.

And right now, the VIX curve is extremely steep and trading at a massive discount to realized volatility.

These imply that traders are pricing in no movement.

At the first bump in the road, even if the market ends up going nowhere, I suspect the VIX will rise sharply as traders reprice options more in-line with historical norms.

This also means that options are cheap now — so if you've got a serious long or short directional bias, take a look at options instead of stocks.

The game plan remains the same: watch biotech (IBB), oil, and high-yield (HYG) to measure risk appetites as they tend to be the tells.

Good luck out there.