Asianmacro had previously called for a continuous rally in S&P500 when it was at 1880 around May 24 and it has advanced almost 4% since https://asianmacro.com/2014/05/24/path-of-least-resistance-is-up/. Back in May, many doomsayers were on CNBC and various media calling for an impending collapse of even 10-15% in stocks. But looks like the shorts and underweights in equities and bonds were all forced to scramble and had to catch up with their benchmarks that they are underperforming against.
However, another indicator which is the USA Federal Reserve Money Supply M2 yoy growth that I track to give me an idea of the pace of liquidity creation in the US monetary system. It has peaked in 2012 in spite of further QE which has propelled the equity markets higher. M2 in itself don’t mean much but belongs to an array of economic & other market indicators which I track. While we might see S&P500 ending higher and maybe even cross 2,000 level by December 2014. But Asianmacro will take his chips off the table for now, pour himself a glass of nice burgundy, followed by a fabulous single malt whisky and watch the FIFA2014 World Cup action unfold. The market is now left to the losers who need to be around. Not me!
It was a full moon last night on 14 May 2014 & usually more often than not, it signals a short term market top or reversal especially in equities. We did see an intraday high where S&P500 pushed above 1900 before reversing lower. It does not mean that we do not get a potential summer rally squeeze in risky assets https://asianmacro.com/2014/05/13/the-summer-carry-melt-up-in-risk-assets/ as we are not into summer yet but just knocking the door around the corner.
However, it does bring to mind the uncertainty & sense of not knowing what to do on certain days with conviction especially by the humble Asianmacro here who is only a small minion in the big scheme of things in the financial markets. The only thing that made sense is the video clip produced by Samsung assembling some of the best footballers on Earth to save us from an Alien invasion where the outcome is determined by a football match .. what else is new!
From the chart above, if you look at the spread between the 1st & 2nd VIX futures contract, we are back again to 155 b.p. difference. Usually a big & growing difference where the 2nd contract value is greater than the 1st contract value implies an upward sloping volatility curve (for VIX) & represent a normalisation of sentiment (or complacency). A small or narrowing difference and in the extreme when it goes to negative value implies an inverted volatility curve (for VIX) where heightened fear of imminent risk of crash in markets resulted in buying of volatility (or VIX) in near contract over that of far contracts.
The above is just a generalisation so as not to bore most of you who might not be equity derivatives & volatility traders. However, as you can see above, whenever we reach 155-175 b.p. spread in VIX 1st & 2nd futures, we do see a correction lower in S&P500 subsequently for a short period of time. Anyway, there are just so many mixed signals in the markets at the moment. Sometimes it’s best to just sit back on the sidelines & wait …
“The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.” – Jesse Livermore