Volatility Falls As Seasonal Cheer Grips Global Wall Street — What Fixed Income, Currency & Commodity Markets Are Telling Us

Investors got a rare piece of good news this morning but the explosion higher in equities will soon reverse as the shorts cover their bets and investors recall that one good inflation print doesn’t make a trend. 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 bearish. 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 the € & EM currencies indicates the $US is weak. The US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the S&P 500 to rise modestly over the next few days then head back into its trading range.

Volatility is declining and setting up for a modest continuation of the seasonal rally. Equity volatility remains elevated in the cash and derivatives markets but will likely come down by next week as older data points from October trail off. Bond volatility has come down and suggests the highs in interest rates may have been set earlier this month, but still remains high enough that I expect a retest of those highs. The fundamental driver of lower volatility is reduced fears of inflation and a hard landing in the US, which are partly substantiated by this morning’s inflation report and a modest amount of positive earnings guidance from old economy industries.

But this positive sentiment will prove ephemeral as more guidance emerges in the 4th quarter. Earnings quality remains poor and presages lower sales and profits. Inflation is declining in many goods but not in services, and crucially not in energy. Fossil fuel commodities prices have fallen of late but mostly are still in uptrends. I expect oil to decline eventually but that will be due to declining global growth, not material supply increases. Other commodities are better behaved, with precious and industrial metals mostly rallying while ags and softs are well contained. Unless we see many more confirming data points the equity bear market remains intact and lower lows are on the way.

My current positions include a small cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETFs UPRO and SPXU, all of which nets out to a small long position in equities, which I expect to exit in the coming days.