I have to admit to breathing a sigh of relief over the past week and a half…in a prior analysis on market volatility, I’d put my money on volatility easing in the short term. The blue ellipse in the picture above isolates this wave down that eased my worries… It was no tube, but yes, I did surf it down okay. I hope you did too.
After many weeks of increased volatility, even Jim Cramer (of ‘Mad Money’ on CNBC) has taken to talking about the VIX… I can’t find a link to his article, but the screenshot below gives a gist.
There are many indicators of unusual conditions in the market. Some point to backwardation, a unique market term that relates to a greater than unity ratio of near term to longer term VIX futures (1 month / 3 month VIX futures as in the picture below) indicating increased concerns in the near term. Others point to the plunge in commodity prices, calling it a commodity supercycle that appears to be ending. And Robert Shiller points to a market top indicator, 9 of 10 stocks above the long-term trend line. View these in all their picturesque splendor below…
Most unusual of all, of course, is the dramatic low in oil prices attributed to oversupply in the global market. But that is an economic vice (the mechanical sort) that squeezes those for whom oil extraction isn’t very efficient or low-cost, and who depend upon oil for their revenues. Countries such as Russia, Iran, and Venezuela are hurt, while US and EU consumers should benefit from lower energy costs. Some experts say that this effect could come into play in the market in the next couple of quarters in the form of improved consumer sentiment.
As for the near term, it would seem that central banks are rather enthusiastic about quantitative easing and relaxed monetary policies. The European Central Bank announced a ~1 Trillion Euro QE program spread out until September 2016 this week. Other national reserve banks are engaged in interest-rate reductions, increasing liquidity in markets. US economic indicators have been positive in recent weeks, and the earnings season in full swing indicates a potential for higher-than-expected earnings growth. While the VIX (the fear index) trend remains elevated, I’ll take refuge in simple statistics (despite the ‘lies, damn lies, and statistics‘ saying) in the table below, and venture that the next week may see a market breaking out to new highs…
We’ve had a decent pull-back today, Friday the 23rd, after a good four day stretch of a rising market, and the 25th falls on the day of the Sun. With your acquiescence, therefore, let’s apply the above statistics to Jan. 26th, and say that an earnings and positive news (ECB, US economic growth) driven rally may continue on beginning the 26th of January.
Full disclosure: I am long equities, and neutral VIX, having exited my short positions.