Bullish Fairness Market Hangs On Assumptions That May Be Flawed
Low possibility implied volatility = low uncertainty
Choice markets are presently pricing the bottom degree of uncertainty we’ve seen since February. That makes me nervous as a result of I feel among the assumptions folks have made might be within the “simply ain’t so” class.
Choice markets price uncertainty through implied volatility (Vol.) On this chart of possibility Vol the spike in the course of the March panic was the very best since 2008. The excessive across the Key Flip Date in early September got here because the index hit All-Time Highs after ripping greater in the course of the summer season.
Emini Nasdaq Implied Volatility Weekly Chart
The excessive on the finish of October got here as markets had been de-risking forward of the election and since then Vol has steadily trended decrease. The present low Vol ranges suggest a a lot decrease likelihood of a giant price change than what folks had been ready for simply Three weeks in the past..
What assumptions have folks made that might go improper?
Properly, apart from some actually exogenous occasion I feel the largest potential shock to present assumptions facilities on Trump. Simply how unpredictable will he be over the subsequent 2 months?
The concept that vaccines might be a is one other in style assumption that might go improper. I hope the vaccines will cease the unfold of the virus however there’s an enormous hole between discovering vaccines and widespread efficient vaccinations.
My view over the previous a number of months has been that the virus will hold spreading and that may result in financial weak point which can finally weigh on bullish fairness market psychology.
I used to be brief stock indices in the course of the late October break, did nothing throughout election week after which bought again to shorting once more after the Pfizer (NYSE:) vaccine rally. My reasoning for buying and selling from the darkish facet is that the fairness market is priced for perfection with the up 4,000 points in simply over 2 weeks.
DJIA Every day Chart
Cash has poured into stocks the previous 2 weeks
The prospect of vaccines being a significant “game-changer” and the prospect of a Biden Presidency with a Republican Senate spurred a document move of cash into fairness markets the previous 2 weeks. Bob Farrell reminds us that the general public all the time buys probably the most on the prime.
Main Stock market indices at All-Time Highs are dangerous information for folk who prefer to be brief stocks.
S&P 500 Stock Quick Curiosity
The US housing market has been very sturdy due to the bottom ever mortgage charges. The housing market has an enormous “multiplier” impact that ripples by way of the economic system.
The bond market sees issues in another way
The bond market appears to be pricing within the prospect of a close to time period financial downturn whereas stocks are wanting previous that to higher days someday subsequent yr.
30 Yr US Treasury Bonds Every day Chart
I purchased TNotes final week after they’d been clobbered by the Pfizer information and bought them this Friday. (It was a lot simpler to sit down with a protracted TNote place than a brief fairness index place – thanks Raoul Pal!)
A weaker is a well-liked assumption
The US Greenback is broadly assumed to weaken subsequent yr (positioning, sentiment and consensus forecasts.) Citigroup Inc (NYSE:) is forecasting USD down 20% in 2021. The reasoning appears to be that vaccines will revive world development, Biden’s insurance policies will harm the USD and the Fed will stay dovish whereas the Relaxation Of The World grows quicker than the USA.
USD Index Weekly Chart
The is close to 2-year lows. Forex market Vol may be very low, the Euro has been in a slender sideways vary for Four months however the main Asian currencies have been trending greater. Maybe the anticipated “adjustment lower” within the USD will come towards Asian currencies slightly than towards European or commodity currencies.
JPY Weekly Chart
The Mexican Peso continues to intrigue me. It’s rallied ~25% from its March lows and appears to have little short-term correlation with every other markets. Because the Peso disaster in 1994 the Peso has fallen ~70% towards the USD in a stair-step vogue: a fast sharp fall adopted by a multi-month rebound.
MXN Weekly Chart
Present s/t Mexican rates of interest are ~4.5% towards zero within the USA. I’ve lengthy believed that there may be a whole lot of “hot money” within the SW USA that flows into Mexico after the forex has a pointy fall (it dropped ~30% in March) in a “reaching for yield” play.
Gold hit with bearish information
was clobbered >$100 on the Pfizer information and is clearly susceptible to breaking vital help round $1850. The gold ETF market has seen modest promoting the previous couple of weeks (after huge shopping for in the course of the $600 surge March to August.)
GC Gold Every day Chart
up on hopes of a requirement rebound
WTI crude oil has been extremely correlated with the S+P during the last month. It tumbled the final 2 weeks of October then reversed sharply greater as November started. It surged ~$6 (16%) following the Pfizer information on hopes that the vaccine would spark a world demand rebound, particularly for transportation fuels.
Crude Mild Oil Every day Chart
My view has been that WTI has been a lack-of-demand story. World demand is down ~10% this yr from final yr and OPEC+ is forecasting that demand for 2021 might be ~4% beneath final years’ demand. OPEC+ meets Dec. 1 and they’re going to attempt to hold a lid on manufacturing. OPEC export income has fallen by ~2/Three since 2012 (2020 income ~$350B) so producers don’t have any alternative however to maintain pumping.
Commodity markets rally
ended this week at a 2-year excessive ~$3.30 up >50% from 4-year lows in March. hit a Four yr excessive slightly below $12 bushel, up ~50% from April lows.
The broad CRB commodity index hit a 27-month excessive this week up ~37% from the 12-year lows in April. This yr’s rally got here after a brutal 9- yr bear market that took the CRB down >50% from the All-Time Excessive in 2011. Possibly that 12-year low this spring was THE low for the commodity market.
CRBC-TR/CC CRB Index Weekly Chart
Market information on CNN.
Dow Jones – Bullish Fairness Market Hangs On Assumptions That May Be Flawed