News Snooze

Do you find yourself paying less attention to your stock portfolio these days? Judging by the low volumes and muted volatility levels recently it would seem that interest in the stock market has declined dramatically. It looks like the snooze button has been repeatedly pushed since June. The TINA-driven market has responded by drifting ever higher. Investors are complacently happy with things as they stand. A Covid 4th Wave slowdown has been met with equanimity. Overt talk of tapering from Fed officials didn't seem to faze investors. Market players are saying, effectively, "Wake me up when this is over".

As the global stock markets drift higher into month-end, investors have seemingly turned off the news. Being bombarded with stimulus, both aural and visual, we are often dulled by the sheer volume of information available on a daily basis. But the pandemic has taught us the value of quiet reflection and contemplation. Without the constant need to 'go-go-go' that comes from the traditional model of commuting to work, people are realizing that they can do with less. That, plus the persistence of the pandemic, has caused the 'V' shape recovery of earlier this year to turn into a 'square root', of flattening growth and diminishing expectations.

With 'Mega Cap Growth' the default option, market levels have reached ever higher on less breadth and volume conviction. The dramatic decline in Small-Cap speaks volumes about investor activity. And don't even talk to me about the EEM or China! This lack of breadth is usually a precursor to a market shake-out. When it comes next is the big question. Will the return of 'normalcy' - whatever that means in this distorted marketplace - mean a correction can finally occur?

As global economies stutter-step into the second phase of the cycle, markets are meandering higher on a narrowing leadership. I'm uninterested in playing this game. I too have turned the 'news' off.

We don't always see it coming, but the preconditions for a market setback aren't in place just yet. For that, we need the narrative to start changing. Watch for 'good' news to replace bad. Then it will be time to worry.

The fear of a slower economy resulting from the Delta variant has been the ultimate example of "bad news is good news". Markets have risen, not despite Delta, but because of it! Jerome Powell's much-anticipated speech during the virtual Jackson Hole reconfirmed to investors his concerns over the effects on the economy from the recent upsurge in Covid cases. Dutifully, Mr. Market went higher as the prospects for a more hawkish stance on monetary stimulus were taken off the table.

No dear investor, I don't have any predictions to make just yet. I just need to see more evidence that we have started to reaccelerate from this recent slow patch. At that point, the news may cause us to pay attention. For now, back to snoooze...

Risk Model: 3/5 - Risk On

A decline in the short-term overbought condition in the XIU has flipped the Model into a buy condition. The same cannot be said for the SPY, which remains overbought. I am taking my cue from the U.S. markets in staying cautious. Sentiment is currently not supportive of renewed risk-taking, with the recent AAII Bull/Bear readings well off their Q2 highs. The Copper/Gold Ratio has chopped back and forth as commodity markets retreat in the face of the data slowdown. Bond Yields have similarly chopped sideways for most of July and August.

Watch the 3mo VXV chart carefully. It has a base-building look to it. And should economic expectations accelerate quickly from their Delta-driven pause, there will be a stress test for markets. Just as we have given up on the prospects for higher rates, they might actually show up. Eurozone inflation unexpectedly popped higher this morning. The persistence of labour shortages and supply chain gaps could combine with renewed stimulus from the Infrastructure deal to generate a second inflation scare later this year. That wouldn't be the news for which this market is currently priced!

3 Month Volatility Index