One of my ]previous posts posited that an upwards divergence in $VIX/VVIX could indicate we were getting nearer a market top. I also guessed that we would probably see one more decent rally before the bears really took over.
I might be eating my words.
This rally has been so insane that we've reset VIX to lows we haven't seen since 2019!
The other solid indication that I showed in the past had to do with watching for bearish divergences in high yield corporate bonds,
HYG
and $JNK.
We had a solid bearish divergence during the fall sell off, but since then? Set a new high for the year! If this market were genuinely running out of steam and about to enter a longer term bear market, I would expect to see this set lower highs and lower lows pretty obvious now. We did briefly, but this rally has been so strong that I think any impending bear market has indeed been kicked down the road for now.
This market does not seem to have any fear at all at the moment. I do, however, think we can get pulled down at least a little to end the year. The big wad of gamma from JPM's 4515 SPX short calls may drag us back that direction from here to end the year. I don't think we'll necessarily get all the way down to that strike price, but we could indeed come back below 4600 by next week.
Once that trade rolls, the start of the New Year may see the bulls take over again to new highs. Just keep an eye on the VIX/VVIX for upwards divergences on the weekly, also look for downwards divergences on HYG or JNK. Lower highs, lower lows. Once you see both of those, it's a pretty good bet that a big, prolonged down move is imminent.
But, that could be months away with how effectively the bulls have reset things since the start of November. Go with the flow. Maybe we go down some to end the year, but likely go back up again in January, likely to new all time highs.
The one last thing that gives me concern in the longer term is history of rate hike cycles and trends in unemployment. Generally speaking, rate hike cycles are meant to slow down the economy to maintain the Fed's 2% inflation target. The result generally is going to be an uptick in unemployment. If unemployment goes up too quickly as rates come back down, then everything goes down. With that in mind, here's a chart overlaying SPX,
FEDFUNDS
and unemployment (
UNRATE
).
There's a pretty decent signal, especially looking at 2000 and 2007, when we get a rate hike cycle and unemployment starts to curl upwards off a local low, the market typically starts to sell off not long after.
Look at where we're at today. Exactly there. The market is just about at all time highs,
FEDFUNDS
are at highs and have flatlined there, likely due to the uptick in unemployment, the Fed did hint that rate cuts were discussed at their most recent meeting.
We're just missing some of the other underlying signs that the market knows it's on borrowed time, and we're not seeing them at the moment.
Sure, we just had a pretty decent red day, almost 1.8% down from the intraday high, and maybe we follow through to end the year, but I'm not convinced this is the high just yet. We have to be not that far away, but I am not yet "sell all assets" or take on a bunch of negative deltas for the long term or anything like that just yet. But, it is definitely time to stay sharp. It might only be a matter of time given the trend in unemployment. Time to listen carefully to any new unemployment report, CPI report, PCE report, non-farm payrolls etc. The market responds sharply to them.
For now, I'm still going to say "buy the dip" is still going to rule, but that tactic is likely on borrowed time. Trade with it until you start seeing the above mentioned signs show you that the market is genuinely starting to become unsure.
I might be eating my words.
This rally has been so insane that we've reset VIX to lows we haven't seen since 2019!
The other solid indication that I showed in the past had to do with watching for bearish divergences in high yield corporate bonds,
HYG
and $JNK. We had a solid bearish divergence during the fall sell off, but since then? Set a new high for the year! If this market were genuinely running out of steam and about to enter a longer term bear market, I would expect to see this set lower highs and lower lows pretty obvious now. We did briefly, but this rally has been so strong that I think any impending bear market has indeed been kicked down the road for now.
This market does not seem to have any fear at all at the moment. I do, however, think we can get pulled down at least a little to end the year. The big wad of gamma from JPM's 4515 SPX short calls may drag us back that direction from here to end the year. I don't think we'll necessarily get all the way down to that strike price, but we could indeed come back below 4600 by next week.
Once that trade rolls, the start of the New Year may see the bulls take over again to new highs. Just keep an eye on the VIX/VVIX for upwards divergences on the weekly, also look for downwards divergences on HYG or JNK. Lower highs, lower lows. Once you see both of those, it's a pretty good bet that a big, prolonged down move is imminent.
But, that could be months away with how effectively the bulls have reset things since the start of November. Go with the flow. Maybe we go down some to end the year, but likely go back up again in January, likely to new all time highs.
The one last thing that gives me concern in the longer term is history of rate hike cycles and trends in unemployment. Generally speaking, rate hike cycles are meant to slow down the economy to maintain the Fed's 2% inflation target. The result generally is going to be an uptick in unemployment. If unemployment goes up too quickly as rates come back down, then everything goes down. With that in mind, here's a chart overlaying SPX,
FEDFUNDS
and unemployment (
UNRATE
).
There's a pretty decent signal, especially looking at 2000 and 2007, when we get a rate hike cycle and unemployment starts to curl upwards off a local low, the market typically starts to sell off not long after.
Look at where we're at today. Exactly there. The market is just about at all time highs,
FEDFUNDS
are at highs and have flatlined there, likely due to the uptick in unemployment, the Fed did hint that rate cuts were discussed at their most recent meeting. We're just missing some of the other underlying signs that the market knows it's on borrowed time, and we're not seeing them at the moment.
Sure, we just had a pretty decent red day, almost 1.8% down from the intraday high, and maybe we follow through to end the year, but I'm not convinced this is the high just yet. We have to be not that far away, but I am not yet "sell all assets" or take on a bunch of negative deltas for the long term or anything like that just yet. But, it is definitely time to stay sharp. It might only be a matter of time given the trend in unemployment. Time to listen carefully to any new unemployment report, CPI report, PCE report, non-farm payrolls etc. The market responds sharply to them.
For now, I'm still going to say "buy the dip" is still going to rule, but that tactic is likely on borrowed time. Trade with it until you start seeing the above mentioned signs show you that the market is genuinely starting to become unsure.