As Q2 begins, we wake up to the S&P 500 making all time record highs, crossing over 4000 for the first time. This sums it up nicely:
The mainstream financial media say this is due to rising hopes of an economic recovery. President Biden’s new $2 Trillion Infrastructure plan is the major story driving markets.
Well, there is also a news story that apparently US manufacturing saw a 37 year high. Yes, that’s right. The highest level since December 1983. Stated as . “the clearest sign yet that a much anticipated economic boom was probably underway”. You can decide for yourself.
Long time readers of Market Moment knew that money printing will not stop. It cannot stop. I am not so bullish on the stock markets due to recovery, but because of the more stimulus bills and money printing that will be coming down the road. Money is running into stock markets and other assets for yield as the real economy withers away.
On the job market side, we had another 700,000 plus Americans file for first time unemployment. First-time claims for unemployment benefits totaled 719,000 last week, higher than the 675,000 Dow Jones estimate and the previous week’s 658,000.
Superb manufacturing data, but continued layoffs point a confusing picture. However, analysts believe Q2 is pointing to an economic recovery (economic boom is the term being used), as consumers start spending their stimulus checks at service and hospitality focused businesses. Might prove to be a challenge if governments impose more restrictions.
Being a technical and market structure guy, I follow money flows. Pure and simple. Money flows never lie. And we are seeing a very important technical trigger on the VIX.
The Volatility Index, or commonly referred to as the VIX, gauges fear in the market. Or as defined by Investopedia:
The Cboe Volatility Index (VIX) is a real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.
The higher the VIX spikes, the more fear there is, which generally points to a sell off in the S&P 500 and other US Stock Markets. The lower, well the opposite. Fear is dissipating.
As you can see from the VIX chart above and the arrows, we have tumble below the 18 level. Levels we have not seen since February of 2020…when the everything sell off began in Stock Markets and other assets on lockdowns.
This is big. But what is more important:
The top trade on Wall Street for years has been to go long stocks, and SHORT the VIX.
As markets climb higher, this is a great trade. But when you see these large spikes in the VIX, it is because these Wall Street shorts are being closed or squeezed.
Breaking below 18 hints to HIGHER S&P 500 targets and higher overall US stock markets. We crossed 4000, and many are saying the next S&P 500 level will be 5000. With nowhere else to go for yield, and central banks propping markets, I think this is a real possibility. We continue higher until the central banks pull the plug, or when the manipulation in interest rates end, and we see rates spike into the double digits.
I am still keeping close eyes on the US Dollar (DXY). The reserve currency is seen as a run into safety. We tend to see US markets drop when the Dollar rises. But this is not happening currently, and many of the US Dollar Milkshake Theory supporters believe this could be the big move in the US Dollar.
With all central banks killing their fiat currencies, which fiat would you rather hold?
The 92.50 zone is the higher low I am working with on the US Dollar, and any drop is just seen as a pullback in the uptrend. The Dollar needs to close below in order to nullify my bullish stance. Hence, I believe the Dollar can still make a move higher, which may start putting pressure on US markets.
The Dollar, and the VIX remaining below 18, is what I will be watching next week and going forward to determine whether we see momentum on the S&P 500 with a 4000 break.