Markets these days have become an interesting data mix. And here’s a challenge – not all the data agrees with itself. If you ask some, the markets have the wind at their back as the economy reopens and the government is talking stimulus for… darn near everything. Others point to data suggesting we could see hyperinflation.
it’s hard to say whether or not the technical and fundamental pictures are well aligned. The technical picture has clouded significantly in the past couple weeks. Markets went from a series of low-volatility of all-time-highs to a higher volatility whip-saws.
The volatility, in and of itself, isn’t that rare. But the recent sequence of returns had been such low volatility that the average daily trading range had really compressed. Pair that with a bunch of computers watching this stuff, and anything that pushes volatility outside the average ranges has the potential to trigger algo’s to start moving markets.
A look at the pricing moves of the SPX will show a series of bigger swings, lower highs, and lower lows. This would typically be a bad sign if the time horizon were longer. However, this falls within a relatively short period of time following a longer low-volatility move higher. So it may simply be the markets going through a bit of a correction-and-consolidation phase.
It may be worth noting that crypto currencies had a doosie of a last week. A bunch of the oddly-named digital tokens had big drops – many off over 50% from their previous highs. This seems to indicate a change in risk appetite in general (or maybe a change in the cost of margin).
It should also be noted that a new narrative is permeating financial media — inflation. Or, more concerning and headline-grabbing: hyper-inflation.
Inflation is an interesting one because it has such a significant sway in many financial models. If the risk-free rate of return changes, that variable then alters the outcome of all kinds of assumptions in the markets. Basically, investors are going to expect different returns from their investments.
You may here it couched as a ‘repricing of risk’ scenario. But basically it’s everyone insisting, with inflation rising, and the 10-year treasury likely to follow, the market values are wrong. (Or, again, the price of margin may change, so the cost of leverage would also change. The effect would be the same.)
Of course, getting agreement on what the correct value is is why we have a market in the first place. So there’s nothing inherently wrong with the idea that folks think values are changing. The question is, will there be enough folks in agreement that it will really start to move the markets one way or another?
For a while now, analysts have been rationalizing higher valuations of stocks because, relative to bond yields, stocks look relatively affordable. The markets seem to have doubts about this thesis recently though, as tech (really high PE’s) has struggled. (In fact, most of the growth side of the style box has underperformed the value side of the style box this calendar year, with small growth, as a category, showing meaningful price drops in recent weeks.)
The value side of the style box has been the larger winner year-to-date. This is likely for a lot of reasons, including the fact that growth assets were coming off of a very strong recovery period during the Covid shut-downs of 2020 and the essential/re-open story that drove their prices to all-time highs.
The question is, are investors simply rushing from one side of the style box to the other because of the somewhat inverse relationship between value and growth? Or is there a more significant shift to the underlying fundamentals of this market that signal a regime shift?
Much of this will get unpacked on this Thursday’s forum call. If you are reading this and don’t already subscribe to BigFoot Investments, you’re welcome to join us as a guest this week. Visit the contact us link and drop an email. We’ll get you the login info.
For this week, watching the SPX, look for support at 4138/4095. On the flip side, resistance should be around 4205.
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