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!
