VTI - VXX: Bully Market Does Not Equal Bull Market

2023-05-04 15:13:33 ET

Summary

• A new bull market requires a dovish Fed and positive growth prospects contrary to the hawkish Fed and negative growth prospects we've now.
• It's difficult/impossible for the S&P 500 to overcome the 4200 level when only a few horses are pulling the 500-issue wagon.
• It's better to be on the ground wishing you were in the air than in the air wishing you were on the ground.
• While in a bull market everybody plays the move UP, in a bully/ing market it's better to bet on A move (volatility) instead of THE move (direction).

Yesterday's FOMC statement , dropping previous ''some additional policy firming may be warranted'' wording, suggests it's likely we saw the last rate hike along the current tightening cycle.

Thing is, no more rate hikes doesn't automatically mean that the Fed is about to start cutting rates as early as next month, even though this is exactly what traders currently expect!

Based on (monetary policy) history, showing that the Fed doesn't stay put for too long, expectations are for the Fed to reverse course soon.

While this might be the case, we believe the Fed will be quite reluctant to cut as long as inflation is closer to 5% than to 2%.

"Pause for cause" can live happily ever after with "higher for longer" for a while, until something "make" (e.g., lower inflation) or "break" (e.g., banking system) happens.

The early stage of a sustainable bull market requires: 1) signs of accelerating economic growth, and 2) easing monetary policy. At the moment, we're facing decelerating growth and a tightening (until yesterday)/neutral (at best) monetary policy.

How can that lead to a bull market?

Moreover, in a new bull market small-caps are supposed to lead the way (light blue line). Right now (black line), they do the exact opposite.

Based on money supply Y/Y change - "soft landing" is wishful thinking and a "hard landing" is the most likely harsh reality we're going to face.

Best environment for stocks is either strong breadth (new highs > new lows) or significant volatility (VIX > 28.5).

At the moment, we have neither, and when this is the case (less than 1/4 of time), the S&P 500 (SP500) annualized return has been negative.

In a bull market, you don't see more new lows than new highs, surely not a stretch as long as the current 21-day (and counting) interval.

This is also being reflected on the Breadth Leadership Sentiment scoresheet, when nothing is suggesting that we're on the verge of a turnaround.

Only 4 out of 9 bull indicators are currently "green."

A bull market requires a lot more than that.

If anything, that's leaning bearish, not bullish.

Does this mean stocks are likely heading down? No, that's not necessarily going to be the outcome.

As you can see below, the SPDR® S&P 500 Trust ETF ( SPY ) maintains its consolidation pattern and the trading range is getting narrower and narrower.

Such a formation can't continue like this for much longer, and a break (either way) is due.

A "bully/ing market" doesn't equate to a "bull market." When it comes to the former, instead of betting on the direction, it's better to bet on a significant move, i.e., volatility which you may play using the iPath® Series B S&P 500® VIX Short-Term Futures™ ETN ( VXX ), coming our way.

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