What Financial Markets Are Telling Us: Don’t Believe The Rally

The market is rallying this morning but I see another leg down in this correction/consolidation due to rising interest rates before the bull run resumes again. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), but my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. The action in major currencies indicates the $US is weak. But there were also several negative factors across global asset classes. Gold is signalling inflation fears. Oil is pointing to stagflationary conditions. Taken together, the market looks set to discount further bad news and fall moderately over the next few days.

Derivatives markets are helping bullish sentiment: the SKEW index of tail risk pricing has been bullish for over a week now and the VVIX (volatility of volatility) continues to signal bullishness as the VIX has come down. Significantly, actual volatility is back to long term levels. Bond market volatility is still muted but the rise in yields has been greater than I expected and likely pulls this market lower. While the dollar fell yesterday this doesn’t feel sustainable either.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a hedged position in the S&P 500 (UPRO and SPXU).