Is Volatility Signalling Higher Prices?

Let’s quickly review the overall stock market and see what’s going on. We’ve had some real nice bullish action over the last week, but is it going to last?

Well the S&P 500 (SPY) has officially broken out of its consolidation from the beginning of the year. Price cleared its downtrend line and the prior high of the consolidation. This raises the probability of a new bull trend starting and lowers the probability of continued consolidation and chop. And yea, price is coming back to kiss the breakout, line but that’s just normal action. The breakout should hold.

We’re also seeing confirmation in the volatility markets with VIX (VIX) closing below its prior low put in on March 9th. You almost never see the S&P downtrending with VIX in the teens.

Oddstats tweeted a pretty cool chart of this correlation between the S&P and VIX the other day. The green and blue shading on the equity curve shows what SPX price action looks like with VIX levels of 18 or less. This makes it easy to see that low volatility = bull trends. A low VIX, means stable SPX pricing, which gives large investors the confidence they need to put money to work.

The volatility term structure has also relaxed which means stress is leaving the system. This ratio trades above 1 during times of stress and below 1 when liquidity conditions are favorable. It’s been holding levels below 1 for the last few weeks which gives us more evidence that this bull has legs. The current value is 0.92.

In just 3 months we’ve gone from hyper volatility back to 2017 style vol. This supports the theory that that the selloff we had was machine driven. It had nothing to do with the fundamentals. It was all because the auto selling from margin calls and crowded positioning that needed to be unwound. The fundies never deteriorated with the price action.

In the video above we cover market fundamentals as well. So make sure you watch it!

And as always, stay Fallible out there investors!

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.