What Financial Markets Are Telling Us: Consumers Hated COVID Too Much To Stop Spending, But That’s About To Change

The race between COVID waves and return to the office has been won of late by the latter, but I expect markets to start discounting the potential for COVID to win out as vaccination rates stall out. The volatility risk premium points to a higher market over the next few days, but 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. Oil's chart is signifying global growth. But there was also one negative factor: inflation expectations are rising based on measures of Treasuries and TIPS. Expect the S&P 500 to be range-bound over the next few days.

The US equity markets are losing steam as we approach the dreaded Autumn months when markets typically fall heavily. The volatility risk premium bullish signals are projecting tops just above the current level in the S&P 500 (4496) while the 100 largest stocks that I follow each day have deteriorating stock charts due to low volumes (adjusted for seasonal factors). Other volatility measures are similarly giving mixed signals: the volatility of volatility index (VVIX) remains bullish but the SKEW index of relative prices for out of the money options remains bearish. Bond market volatility is extremely low as measured by TYVIX and my reading of the yield curve points to a narrow range rather than a major move upwards as those buying Money Center Bank stocks (i.e., JPM, C) are hoping. Low interest rates support the stock market but offsetting that is the action in the $US, which I expect to resume moving higher, driven by drops in the €, the Chinese Yuan and EM currencies like the Mexican Peso. These mixed signals conform perfectly with the uncertainty of delta COVID matching up against moderating economic data out of both DM and EM. Across the US and Europe the business sector and consumers are tamping down expectations due to the recent COVID wave, and I expect that to weigh on markets as we wait for booster shots to begin in earnest in October.

Yesterday I sold my position in Korn-Ferry (KFY), and my current market positions are in American Express (AXP), Facebook (FB), MKS Instruments (MKSI), Starbucks (SBUX), and a short position in the SPX (SPXU).