You’ve heard it here before, if you are looking at the VIX to identify perceived risk to the historic gains over the last seven years in U.S. equities, you are likely looking at the wrong thing. It’s not that the VIX in and of itself is broken, it merely measures supposed fear of an underlying risk asset that trades without fear, as it should on a relative basis to many other equity markets in countries/regions with far greater economic uncertainty than our own.
Despite some recurring fears about the impending breakup of the EU or China’s economic implosion, our Fed has navigated unprecedented waters fairly adeptly (with less regard to future consequences), and for the time being, might as well hoist the banner:
They have won! They have successfully created the most artificial free market economy the world has ever seen, which has created an untold amount of wealth for a very small subset of the population, and in doing so created a false sense of security to the masses as it relates to investment risk, largely predicated on a fear of missing out.
Once useful indications of fear, like equity volatility has become a sham as a result of monetary policy that has specifically targeted the reduction of said volatility to induce risk taking. So for those of you who are looking at such pedestrian risk indicators like the VIX, don’t waste your time. But don’t think for a second that the volatility witnessed in the last year in global currencies, fixed income, commodities and equity markets in Europe, Brazil, and CHINA will not eventually find its way into our equity markets. It will be inevitable, but from what level and in which direction?
Is there a chance that kind of reasonably priced large cap U.S. stocks break out of the 2015 range and go up 10% in a straight line? No doubt about, but I think the likelihood is far greater that we see at least a 5% pull back in the coming months. From a trading perspective, the S&P 500 (SPX) sets up fine here for those long and strong, except for a meaningful break of the uptrend that has been in place since October, when the SPX was some 15% lower:
If we do get a breakout in the coming days, and it comes with poor leadership and low volume as we head into summer trading, then I suspect it’s a great set up to fade the move and play for a break below the downtrend and at least a test of the 200 day moving avg at 2050. But in the meantime, the big money made it clear yesterday that new highs are in the cards.