What I’m Observing in Stock Indices

Right Now:

DJIA: At an all-time high

S&P500: At an all-time high

NASDAQ 100: Just below the all time highs of 2000 and late-2015

RUSSELL 2000: Just below the all time high of mid-2015   

I believe that the probability of stocks continuing to move higher increases if the NASDAQ 100 and Russell 2000 break past their all-time highs. The technical move in stocks is ‘confirmed’ if all the major indices surpass their all-time highs.

This also means that if the NASDAQ 100 and Russell 2000 can’t push through their highs, it will be difficult for stocks to keep this recent move going.

Historically:

Markets become increasingly susceptible to bubbles when interest rates are low and money supply is high. This is the environment we are currently in. Historically and intuitively, we are in for an eventual big correction in stocks due to monetary policy. But as long as interest rates hug 0%, we could be in for higher prices in stocks for some time. There is no saying where the top is.

 

My preference is to follow what the aggregate voice of the marketplace is telling me. My core strategy is to buy strength and sell weakness. This puts me in position to capture the big moves in markets. While I acknowledge the fundamentals of stocks, I’m not one for calling tops and bottoms. I’ll let the market do that for me.

 

Anytime I think that interest rates will stay at 0% forever, and that prices are going to the moon, I’ll come back to this quote:

"But I think our ace in the hole is that governments usually screw things up and don't maintain their sound money and policy coordination. And about the time we're ready to give up on what has worked, and proclaim that the world has now changed, the governments help us out by creating unwise policy that helps produce dislocations and trends."

-Jerry Parker

Crude and Stocks

The correlation between stocks and Crude Oil has been strong.

I think the correlation may be due to bank exposure to oil debt--The lower oil goes, the greater the probability of oil companies defaulting on their debt.    

While stocks have been moving higher lately, oil has moved lower. I think this price divergence is worth noting.  

There is no saying where oil goes from here, but if the prices continue to move lower, stocks may follow.   

Based on recent price data, I have a hard time believing in a reality where oil moves back down to $40 and stock indices stay strong. But, then again, anything can happen in markets.

Post-Brexit

Last week I posted a chart of the DJIA post-“Brexit.” Here’s where the DJIA was:

Here’s where the DJIA is now:

This was one of the wildest weeks I’ve ever seen in the market. I could not have imagined the DJIA could move so fast in both directions in only five trading days. The “V” move up from 17000 was remarkable.

If the DJIA fails to break above 18,000 in the next few weeks, I expect the stock market to move erratically in the search for price discovery and thus for volatility to increase.

With increased volatility comes more expensive option premiums.  

You can’t buy insurance when the house is already on fire.

--

When the VIX, the CBOE volatility index, spiked up last Monday, gold and silver surged higher, as did the $USD in relation to the falling British Pound and global stock markets.  

The big moves up in gold and silver are telling in relation to the current market environment. Gold and silver continued their move upward as the $USD and the VIX dramatically fell while the stock indices recovered throughout last week.

Either gold and silver are foreshadowing more future volatility, or gold and silver are set for a big move lower.

Both scenarios are realistic, but in light of inflated currencies worldwide courtesy of low interest rates+QE, and a plummeting British Pound, its seems prudent to bet on volatility catching up to gold and silver’s price action, not the metals moving down.

***It's impossible to know if any of these trends will continue, but building low-risk, high-reward trading ideas around a general thesis with confirming price movements is an approach I subscribe to.