The amount of noise surrounding the near-term direction of the stock market has become insane. Some cite the pessimistic sentiment as a contrarian bullish sign, while others examine declining earnings expectations and their implications.
So, how will this turn out?
Take a look at this chart of the September VIX futures contract and the ES futures. These two are typically inversely correlated. What do you think will happen next?
The VIX contango at the near end remains above 10% even after April's expiration last week, which is a clear sign of complacency.
We described the VIX expiration effect earlier this week.
Market breadth is another important metric, and it has been rather weak. The medium-term NYSI indicator is rolling over.
But we have to acknowledge that the breadth interpretation is not so simple. We are not at some crazy extreme here.
However, what is absolutely clear is that high beta stocks are underperforming.
And what about that pessimistic sentiment? There are many ways to measure stock market sentiment, which makes it one of the most manipulated statistics. We prefer these two time series, and they definitely do not show pessimism. Quite the contrary.
Let’s conclude this post with seasonality. A tool that has often been useless for the stock market. But it makes so much sense in retrospect, and people love it for its simplicity.
Well, the truth is that the S&P 500 has been following the seasonal trend quite well over the past few months. But we are approaching the time when the seasonal tailwind takes a pause.
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I expect interest rates to hold steady, and inflation stubborn at 3.5-4%, and expect the market to remain defensive into the fall.