What Financial Markets Are Telling Us: Stability Now!

The global economy is stabilizing despite Omicron’s spread as consumers and investors are weary of worrying about the worst and instead looking forward to earnings season. 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's cross-asset action brought several positive factors for US stocks. Gold is projecting $US weakness. Copper's chart is signifying global growth. The action in major currencies indicates the $US is weak. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Oil is pointing to stagflationary conditions. Expect the S&P 500 to rise modestly over the next few days.

The action is commodities tells me the equity markets are on firm footing to trade around all-time highs rather than fall off. The breakout of copper signals more than just EV demand but also resilience in the global economy despite constant disruption and China’s unpredictable politics. And the surge in gold mirrors not just higher current inflation but the recent drop in the $US, which has clearly surprised investors and signals that we are in a bout of confidence building over the notion that COVID is becoming endemic and thus manageable. Finally the new highs in oil suggest not only supply/demand imbalance but confidence that stagflation will be temporary rather than debilitating. The stability of inflation expectations undergirds all of these movements and tells me the Fed is being prudent and objective rather than reflexive in pushing interest rates modestly higher.

While commodities suggest stability the derivatives markets suggest the bulls are ready to take the market to new highs. The SKEW index of tail risk has been declining this week as the S&P 500 consolidates, suggesting the bulls are confident the market will rebound. Meanwhile the VIX itself has failed to generate any sell signals even as actual volatility has trailed off this week. The rise in interest rates is clearly seen as natural for a stable global economy, and I see only a geopolitical shock capable of pulling this market lower.

My current market positions include a large cash position, and the following holdings: Activision (ATVI), Amgen (AMGN), American Express (AXP), Johnson & Johnson (JNJ), 3M (MMM), Starbucks (SBUX), Titan Machinery (TITN) and a long position in the S&P 500 (via the levered ETF UPRO).