ACTV - Market Out Of Balance
2023-08-28 08:15:00 ET
Summary
- Our signal is telling us that the market is out of balance.
- Volatility is being priced too low, which we believe to be an indication that insurance (downside hedges) is an afterthought.
- Higher rates could take time to have an impact. Meanwhile, the immense fiscal spending by the US government is still pouring through the system, keeping things afloat.
The proprietary indicator that we told you about last week is still flashing a yellow caution signal. We had several questions this week about it. What is it? What is it telling us? Our signal is telling us that the market is out of balance. It’s as if no one has bought insurance. If the house were to go on fire here, there is no one around to put it out. In fact, many players would need to sell if everyone is selling throwing gasoline on the fire. Mostly, we are concerned that systematic strategies, with volatility control in particular, are too tilted to the long side of the market. Volatility is being priced too low, which we believe to be an indication that insurance (downside hedges) is an afterthought. Our signal refuses to go red. Maybe the market is going to cool off enough and downside hedges will accumulate, which will cushion any news to come our way. We don’t think so. We will continue trusting but verifying our data. The market is due for a burst of volatility. We hope to take advantage.
We are starting to think that the only thing holding up this economy is the money flowing from the government and Taylor Swift. The big four in Asia (China, Japan, Korea and Taiwan) are showing imports down 18% year over year (BofA). A higher US dollar and higher US bond yields are having an effect somewhere. Higher US stocks will mean higher yields for longer. The thing is that most consumers and corporations have fixed-rate debt. Higher rates could take time to have an impact. Meanwhile, the immense fiscal spending by the US government is still pouring through the system, keeping things afloat. The Atlanta Fed has a very good track record predicting GDP. Right now, they are seeing 5.8% for this quarter. That is a little too hot. That's what happens when you have deficit spending of $3 trillion for three years in a row. Too much, too fast. Eventually, this all goes bust. For now, the leaders of this market (technology) are ignoring the higher bond yields. They shouldn’t.
One of the best trades in 2023 has been selling volatility. That is like picking up pennies in front of a steamroller. We think the steamroller is about to have its day and volatility rises. We will know if the shift in sentiment has turned this into the beginning of a more prolonged bull market when the S&P 500 tests the 4000-4200 area. A short-term selloff of 9-13% would present itself as a healthy, burning-off of positioning too heavily weighted towards the bulls. A break of that area would indicate a retest of the lows put in last October.
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Market Out Of Balance