What Financial Markets Are Telling Us This Week

The S&P 500 is tip-toeing higher while other asset classes dance around at times hysterically. 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), while my technical reading of key stocks in the S&P 500 is bullish. Yesterday there was one negative factor across global asset classes. Inflation expectations are rising based on measures of Treasuries and TIPS. But taken together, the market looks set to overcome these concerns and rise moderately over the next few days.

Wall Street strategists note higher interest rates are a key risk factor, but the current move higher in the yield curve looks unsustainable and that’s keeping equity bullishness in place. The downturn in commodities also looks temporary, as the Chinese Communist Party learns the limits of micromanaging global markets. The derivatives markets are similarly giving off mildly bullish signals: implied equity volatility (VIX) is at moderate levels but relatively high given actual volatility, while the low volatility of volatility (VVIX) supports the bullish case as it implies the VIX level is due to hedging and other non-fundamental factors (as seen in the SKEW). Bond market volatility has risen of late but the CBOE’s measure of it has yet to move (TYVIX). All this points to the bullishness in equities likely lasts through the Fall rather than follow the typical sell-off in September-October. One key indicator is the action in Colgate-Palmolive (CL), which turned to the upside yesterday, a good omen for confidence in owning staid old consumer stocks rather than narrowly focusing on FANG. I see the major risk going forward as a further rise in the dollar, which would signal foreign investors rethinking their US exposure. The safe-haven status of the US equity market looks secure but the $US could change that.

Yesterday I added a position in Pfize (PFE), and my other current market positions are in Facebook (FB), Korn-Ferry (KFY), MKS Instruments (MKSI), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).