What Financial Markets Are Telling Us: Be Wary Of The Autumn But Be Rational And Stay Invested

Superstition about September corrections mingled with depressingly stagnant vaccination rates are keeping the US equity market in a trading range. 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 several positive factors for US stocks. Oil's chart is signifying global growth. The action in major currencies indicates the $US is weak. Given this mix of positive fundamental factors but cautious sentiment, expect the S&P 500 to be range-bound over the next few days.

The reason is a major correction isn’t likely is that inflation in America is generally low, which is key to interest rates. American inflation is a matter of perspective since American consumers aren’t homogenous. Contrast with Europe where inflation is threatening lifestyles and electoral outcomes. Low inflation keeps liquidity pumping out of the Fed and that supports equity markets, while in Europe elections could throw equities for a loop. What the derivatives markets are telling us is that while economic and political fundamentals drive equities higher over the next year, there is little desire to make big bets now because of both seasonal superstitions and uncertainty re vaccination rates. The volatility of volatility (VVIX) is bullish but the SKEW index of hedging shows inordinate concern about major downmoves, indicating investors are content to just ride the bull market rather than put a lot of new money to work in it.

My current market positions are in Activision (ATVI), American Express (AXP), Amgen (AMGN), Gibraltar Industries (ROCK), Johnson & Johnson (JNJ), 3M (MMM), Pfizer (PFE) and a short position in the SPX (UPRO and SPXU).