What Financial Markets Are Telling Us: Sometimes The Fed Makes Mistakes, So Everyone Take A Step Back Please

The markets are wary of a Fed mistake as well as the dreaded rise in interest rates that Fed tapering of its quantitative easing program entail. The volatility risk premium points to a market fall over the next few days but my technical reading of key stocks in the S&P 500 is modestly bullish. And there are several negative factors across global asset classes. Copper and Oil charts are pointing to declining global GDP expectations, while the action in currencies signifies $US strength. So expect the S&P 500 to fall modestly over the next few days.

Because the consumer is slowing the fear among investors this morning is the Fed is taking the punch bowl away just as people are leaving the party. Gas inventories are up while auto traffic and air travel are slowing down, confirming that the drop in consumer sentiment reported last week has been acted upon across the country. But this fear is likely overblown as only very bad news on delta COVID (or a massive geopolitical event like Kim Jong Un targeting Japan) can further dent the consumer’s desire to spend. The derivatives markets are signaling that the current fear is likely a short-term blip, as the VIX is giving contradictory bullish and bearish signals, while the volatility of volatility index (VVIX) has yet to go bearish. The SKEW index is actually declining, suggesting some hedges are being reduced, a sign the bulls are more interested in buying the dip than in evading a falling knife. Commodities are declining but gold is trading within its summer range, signaling investors are repositioning for the short-term rise in volatility, not descending into a risk-off mood. And the action in bonds is modest, telling us the macroeconomic view hasn’t changed: investors expect a gradual slowdown as the stimulus peters out and herd immunity stretches far out into the future. Since US firms have proven their ability to raise profit margins to counter a slowdown, profit estimates are still rising and this will keep the bull market intact while we work through this week’s modest correction.

My current market positions are in Facebook (FB), Korn-Ferry (KFY), MKS Instruments (MKSI), Starbucks (SBUX), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).