Monday, October 1, 2018

The calm before the storm?

Notwithstanding today's NAFTA USMCA driven reflex rally today, one puzzle to this market is the remarkable level of complacency in the face of potential market moving events, such as a trade war.

From a technical perspective, complacency can be seen through the historically low level of weekly Bollinger Band on the VIX Index, which has foreshadowed volatility spikes (h/t Andrew Thrasher). The chart below depicts the 10-year history of this indicator. While the sample size is small (N=5), four of the five past instances have seen market corrections (red vertical lines). The only exception occurred when the stock market had already weakened. When combined with episodes of low levels of NYSE and NASDAQ new highs, which is the case today, the outlook is particularly worrisome.

The full post can be found at our new site here.

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