To The Moon

Prepare for higher volatility, things are about to turn!

After a relatively calm first half of the year, and overall a pretty good time for most markets — things might be about to get a bit mucky heading into H2.

The historical pattern is for volatility to rise into the second half of the year.

As a matter of fact, we are basically right on the cusp of the seasonal turning point (the average level of the VIX tends to rise from now through Oct/Nov).

But seasonality is just that: an average of the past. The way I look at it you should bring in seasonal information once you have an existing strong thesis and have it help to round out and build conviction… or alternatively as a prompt to check out the bigger picture in the first place.

So let’s look at the situation now:

--Valuations: US large cap stocks are increasingly expensive (especially tech, which has reached a new post-dot-com bubble high on a number of metrics), meanwhile defensive assets like bonds are cheap.

--Cycle: More of the same mixed signals on the cycle front, overall growth is ticking along, but a number of cycle indicators are saying we are late-cycle and some of the surveys have deteriorated recently.

--Policy: The Fed is stuck between sticky inflation and resurgence risk vs a desire to pre-empt any labor market weakness (steam has come out, but not outright weak yet); for now they are locked-in to pause mode, no easing any time soon, ongoing tightening; long and variable lags of hikes still playing through.

--Sentiment: Is extreme bullish, whether you look at surveyed sentiment, margin debt gearing, trading in leveraged ETFs, portfolio positioning… investors are all-in on stocks.

--Technicals: Are mixed, it’s a strong uptrend and there’s no denying that, but breadth is soft and there are a few weak spots and risk flags quietly waving in the background.

--(Geo)politics: The risk of significant escalation in multiple hot spots is very real (Israel and Iran/Hezbollah, Russia and Ukraine/NATO, , meanwhile (relatedly) the US election draws ever closer.

As you can gather, it looks like we are getting to the pointy end of things here. The stockmarket is priced for perfection, monetary policy is tight, the cycle is late, sentiment is all-in consensus bullish, technicals are mixed with some risk flags, and (geo)politics are heating up with many potential risk catalysts.

So in my book that looks like a compelling case for rising volatility, and then you look at the chart below and that just about rounds it all out.

Key point: volatility is set to head higher into H2. $Cboe Volatility Index(VIX)$ $S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $DJIA(.DJI)$

Image

https://x.com/Callum_Thomas/status/1807885590635110482