What Financial Markets Are Telling Us: Global Growth Is Weakening And Exuberance Is Temporarily Irrational

Despite good news from the Fed yesterday the equity market is beginning the diverge from reality. 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. There are several negative factors across global asset classes. The action in currencies signifies $US strength. The US yield curve is bear steepening. Expect the S&P 500 to be range-bound over the next few days as we await a correction.

The markets are signaling slow global growth and monetary tightening, typically a recipe for a equity market correction. Yet equities are seeing rising volumes, which suggests the bulls are gaining confidence and that any correction would be minimal. Similarly, the derivatives markets are signaling that the bulls are hedging their bets but that volatility is quite low, so that any volatility going forward would signal a mild correction and thus a buying opportunity. Key is the action in the $US and the US yield curve: should the $US break out against EM currencies it would be bad news for equities and a correction was imminent. And should the long bond break back to earlier lows this would bring money out of equities and into bonds, causing a correction. This would be cause for cheer as a correction should be bought as a Santa Claus rally is in the works, while the new year will likely see a return to higher volatility and possibly stagnating markets.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), Apple (AAPL), FedEx (FDX), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a small net short position in S&P 500 (the levered inverse ETF SPXU).