Expecting A Bounce In Volatility

The S&P 500 has rallied over 10% since the February low, push the index up to its 50-week Moving Average. Meanwhile the Volatility Index ($VIX) has declined approx. 47%, sending the ‘fear index’ to its lowest level so far this year.

One way to use Moving Averages besides in terms of trend identification and areas of support and resistance is measuring how far a security or market is from its specified average price. Currently the $VIX is the furthest it’s been from its 50-day MA since the prior lower high in the S&P 500 back in October 2015. As the chart below shows, it’s now more than one standard deviation below the mean based on the distance Volatility historically travels away from its 50-day.

Previous instances of the VIX falling this quickly has led to tough market conditions in the short-term for equities. As I mentioned on Twitter yesterday, the $VIX is also near its 200-week Moving Average, which has been an important level in the past. Steve Deppe also shared on Twitter that when the VIX that since 1990 when the index’s 20-day return is less than -30%, the average forward return for the S&P 500 over the next 5, 10, 20, and 40 days has been negative.

It’s important to remember that there are two ways that Volatility can correct it’s current stretched condition – time and price. We could see VIX move sideways and remain near 15, allowing its 50-day MA to ‘catch up’ or we could see a bounce sending Volatility higher. We obviously can’t know which option will occur, but it does seem that some form of mean-reversion needs to occur – whether it be via time or a large price movement.

sp500-vs-vix-50d-rsma-params-5y-red-x-x

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Is Gold Changing Trend or Seeing A Bear Market Bounce?

While the focus for 2016 has been squarely on equities, China, and oil, gold has been an interesting market to follow for the beginning of this new year. Below I’ll be reviewing three charts for gold ($GLD) and share my insights into what’s been taking place in the price action.

Monthly
First up is the monthly chart for gold ($GC_F) going back to 2005. I’ve included the 50-month Exponential Moving Average as well. While I typically use Simple MA’s more often, when looking at monthly charts with longer time frames being included in the average, an Exponential Moving Average can often provide a clearer picture, as it gives a stronger weight to the most current data.

As we can see in the chart below, the trend in price has been defined by the 50-month EMA, which has been a form of resistance since 2013 and is where gold prices are currently testing. I also would point out the level we’re at in the Relative Strength Index (RSI) – while this momentum indicator has been in a multi-year bearish range, it recently has broken out to a new 3 year high.

monthly gold

Weekly
Next we have the weekly chart. Here we can see the nice bullish divergences that have been taking place in momentum for both the RSI and MACD indicators. The RSI made its low back in 2013 and has been making higher lows ever since. While the MACD has been in a range since 2014. Price has been in a declining channel as shown by the blue trend lines on the chart below. Last week we finally saw price break out from this channel as the RSI moved close to 70.

gold weekly

Sentiment
Finally, we have sentiment. The graph below comes from SentimenTrader and shows sentiment for gold since January 2015. As you can see, while we had been at pessimistically low levels not that long ago, gold traders have now moved this sentiment gauge near an extreme optimistic level. Jason at SentimenTrader put things nicely in his take on gold, “If gold is undergoing a long-term (six-month+) trend change, then we likely won’t see too much of a correction from here. But for the moment, the bear market is intact, and extreme optimism during a bear market is usually greeted with heavy selling pressure over a multi-week time frame.”

gold sentiment

I agree with Jason in that we are at an important moment for gold in whether it’s long-term down trend is preparing to flip. Going forward I’ll be watching to see how gold prices react to levels I’ve mentioned above (the resistance on the monthly and channel levels on weekly). I want to see how gold reacts around the $1300 level on the upside and we do get a pull back, if it respects prior resistance from the channel on the weekly chart.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Grumbles Coming From The Bond Market Grow Louder

Even if your focus is squarely on equities, understanding what’s taking place in other markets is an important factor when it comes to managing a portfolio. It’s often said that the bond market leads stocks and the first moves to a major change in trend, whether it’s the trend in markets or economy growth often begins with fixed income. Credit markets garnered much attention (at least in my opinion by how much those I speak with have been talking about it) in the last 6-12 months.

One such piece of evidence around the concern for credit markets comes from Jeff Bahl, the former head fixed income trader at Goldman Sachs, who now manages his own fund. Bloomberg covers the story (h/t to Jesse Felder for sharing the story on Twitter). I wanted to share a few points Bahl makes…

Historically, there has been a clear correlation between well-capitalized companies outperforming their weaker counterparts during periods of rising corporate leverage. However, that relationship has not held since 2011 as the market has rewarded higher leverage (indicated in the exhibit below). As a result of the positive feedback loop, debt on corporate balance sheets is now at levels not seen since the financial crisis.

bond chart

Balh makes a good point that ‘high yield’ bonds should not be categorized as such based on their credit rating, as history has shown credit agencies don’t always get things right. But that they should be viewed as ‘high yield…based on their actual yield (novel idea!). He goes on to give two examples of this, with Freeport-McMoran and Sprint.

Ending the letter with:

While history does not repeat, it certainly rhymes. This time it is not different. Corporations that have depended on the depth of the capital markets for their expansion are firmly in the crosshairs. As opposed to the past six years, a “V-shaped” recovery in credit spreads is not coming. Similar to the unwind of prior credit booms, this deleveraging cycle will be longer and deeper than market expectations. With a contracting credit market, further access to capital will be at progressively more punitive terms.

I’m not overly concerned about the “why” for the market, there’s plenty of opinion that can point you in a million different directions, any of which will surely fit your personal bias, whether it be oil, the dollar, China, or Donald Trump. What’s important in my view is understanding that the winds are changing in the fixed income. There’s a hell of a lot more money at stake in credit markets, and when it moves it can have massive ripple effects.

Source: It’s What You Owe (Bahl & Goynor) 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.