The Doom Build-Up
There's a desperation that's brewing to find bargains or to see market tops across private and public sectors of the financial markets. The doubters, who've wrote, shouted and acted about the "over-stretched" markets, are now pondering the long-awaited correction, which still seems quite illusive. The doubters of the current trend include seasoned professionals, active money managers and perplexed observers of all kinds. Since July 26, the VIX (Volatility index) has woken up from a slumber, going from 8 to 14. Perhaps, the dormant risk has brought levelness or some pulse to the smooth-sailing market. Albeit, this is all minor when digesting the nine-year bull market.
Shocking Calm
Yet, the status-quo has not been quite derailed. As yields come down faster even in nations that are risky on many levels, such as Greece and Spain, big capital is still looking for investable areas. Amazingly, even after the Barcelona terrorist attack by Islamic groups, the Spanish 10-year government bond is trading around 1.5%. Italian long-dated bonds stand at 2.03%, and Greek 10-year bonds stand at 5.63%. Just to put things in perspective, five years ago Greek Bonds stood near 24%. That was around the height of the European crisis. Clearly, today the “perception of risk” has dramatically lessened, at least in financial markets. There's nothing shocking about the very low to negative interest rates at this junction. In fact, it's a tiresome reality, but one day this perception of calmness will explode to various doses of reality. When's that day? Are early clues visible yet? Haven't we heard it before to only see years go by? The suspense lives on a bit, but the artful coordination by Central Banks has enabled a narrative of low risk to persist boldly.
Bargain Hunting
The “value-seeking” camp is desperate to find bargains, despite appearing calm and patient for a long-awaited market correction. What exactly is “value” these days? Google or Amazon? It is hard to claim the best performing stocks are in value related areas when “FANG” has caused such explosive momentum in stocks, where these relatively authentic companies have gobbled up a noteworthy market’s share, putting others to shame. Where's the bargain? In energy, retail or some specific beaten-up names? Value chasers are looking for near-obsolete retail that may survive the onslaught or an energy company that can overcome the massive pressure from the oil glut. In reality so many professionals are seeking or fearing a massive reset, an ultimate test of reality, a notable shock to test the coordinated Central Bank’s narrative, a correction to expose the hidden risks and to identify the true state of the real economy. The dream of the short seller and the nightmare of the ultra-bull have not converged yet, leaving more anxiousness and suspense. The short seller will not stop being skeptical even after taking a beating from the ongoing bull market. And the momentum chaser is not eager to abruptly sell, since the very minor hiccups and panic like traits suggest the resilience of the status-quo.
Bitcoins are battling for a moment of supremacy, too, given the huge run up. FinTech boom is visible left and right, from payment processors to Cyber security to robo-advisor. There's the massive innovation gold rush, where only few survive. Again, even in the private and venture world, the entry point for new investment is not ideal (for the most part), considering longer-term commitment. A correction is a good barometer of risk perception and less visible realities. Perhaps, a breather of sorts enables all to reassess past risks and risks moving ahead.
Key Levels: (Prices as of Close: August 18, 2017)
S&P 500 Index [2,425.55] – After peaking on August 8 at 2,490.87, the index has been in a mild correction mode. Certainly, the bulls are being tested with their conviction; a break below 2,400 can set off a wave of compounding fear.
Crude (Spot) [$48.51] – Between the glut of supply and rift between Saudi and Qatar, the prices for Oil seem quite stable. Of course, surging above $50 has been quite a challenge, and many traders are noting that. Yet, June 21, 2017 lows of $42.05 have set the tone for now.
Gold [$1295.80] – Re-acceleration continues since early July. An interesting development where the strength has picked up momentum, causing gold to break above $1,300, is sending a technical message. With defensive-like assets in demand, maybe Gold benefits a little as the Central Bank theme is being doubted a bit.
DXY – US Dollar Index [93.43] – There’s one trend that’s crystal clear in 2017 and since Trump’s presidency: weak dollar. Is it related to the calendar year or White House? Maybe it does not matter. Frankly put, has a stronger Euro and EM FX driven the dollar lower on a relative basis?
US 10 Year Treasury Yields [2.19%] – After failing to surpass 2.30%, yields have declined in a period of rising gold prices and volatility equity index – which further signals the rush to safe assets. Plus, the bond markets do not have a lot of faith on the real economy recovery.
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