To The Moon

Learnings and conclusions from this week’s charts: $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $Cboe Volatility Index(VIX)$

• The underlying trend is bullish.

• Volatility (the VIX) is low and falling.

• Credit spreads and tail hedging demand is also low.

• Some signs are pointing to an upturn in volatility.

• China is ticking up, Canadian stocks are cheap.

1. The Trend is Your Friend

This is an interesting way of presenting the path of price — by looking just at the 200-day moving average itself. For a lot of investors, this is probably a much more useful chart than the daily tick-by-tick. And the message or current status is fairly clear.

2. Retail Rush

After a period of slumber, retail animal spirits have risen once again and the greed train has left the station.

3. Tail-Risk Hedging

A very interesting contrast to the previous chart — pricing for deep out-of-the-money puts has plunged to multi-month lows (basically the demand for tail risk hedging has dried up).

4. The VIX of VIX

Similarly, the VVIX (volatility of volatility) just made its lowest close in about 8 years — so it raises a question of sorts: do you go with the momentum here of rising stock prices and falling volatility? or do you take the contrarian perspective that this is the flipside of greed and represents deep complacency?

5. Credit Spreads

Another angle on this — credit spreads are also plumbing the lows, again we can consider 2 thoughts; a. it’s a good thing because it means credit markets are running smoothly and there’s no default issues and the trend is down not up, or b. it’s a bad thing because there is no cushion for default risk, doesn’t factor in mixed macro signals, and credit spreads are expensive at these levels. And well, both of those thoughts are basically true (until they’re not).

6. Volatility Seasonality

One point to consider in all this —> seasonality has a say. Credit spreads and volatility have a historical tendency to rise during the May-Oct period (mirroring the tendency for stocks to be weaker during that period also). And this year we have (geo)politics to contend with, notably November.

7. The Clock is Ticking

Meanwhile, when it comes to the VIX, the Fed has started the timer. The VIX tends to rise when the Fed hikes rates (with a ~2-year lead time). Unless things are different this time, that means we are right about due to see the trend turn for volatility.

8. The Tape is Turning? 

And if we look at this unusual volatility indicator (which is simply the rolling annual count of daily price changes worse than -1%), it looks like it has turned up already after plunging to the lows. Historically that is not a good sign.

9. China Bulls and Bears

One area of the markets that is looking brighter though is Chinese stocks, and one of the key bullish points is how bearish everyone still is on China (yes some market technicians will be on board with the price action, but the consensus/crowd is still very skeptical and pessimistic on China). In particular, short covering could soon become a tailwind if the recent uptick in Chinese stocks continues.

10. The Canada Discount

While some might argue this is a result of politics, and there probably is some element of that, the bigger issue for Canadian vs American stocks is sector skews. Canada has a much greater weighting to value sectors vs growth sectors (and we know value has majorly underperformed vs growth) e.g. Canada has 30% in Energy + Materials (vs 6% in the S&P500), and 35% in Financials (vs US 13%), meanwhile only 8% in Tech (vs more than 30% for the US). Which goes to show that often times country selection is as much about sector selection than anything (but there still can be significant opportunities).

https://www.chartstorm.info/p/weekly-s-and-p500-chartstorm-12-may-aa3