What Financial Markets Are Telling Us: Hold Off On New Bets But Don’t Lose Hope

With geopolitical issues in limbo and earnings estimates rising the market is optimistic but lacking conviction, setting us up for range bound trading over the next few days. The volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is bull flattening. But there was also one negative factor across global asset classes. Copper is pointing to declining global GDP expectations. Expect a new round of consolidation as the S&P 500 hovers near the new highs set Tuesday.

Scant progress can be seen in the major geopolitical issues, namely US stimulus bill, Europe’s energy crunch and China’s property developer crisis. That’s leading markets to simply focus on earnings and fundamentals and since earnings are facing off against higher interest rates, the result is a market with little conviction. Despite making marginally new highs the bulls continue to hedge their bets as evidenced by the SKEW index. Actual volatility spiked up and then declined while the VIX elevated, but the S&P 500 simply retraced the move up to new highs, implying the bears tried but failed to take the market lower. And bond volatility may turn lower as short rates are topping while long are falling, while both the $US and commodities are consolidating. All this points to a period of consolidation while we wait to see how the major geopolitical issues conclude.

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 small net short position in S&P 500 (the levered inverse ETF SPXU).