December will not be a snoozer - Risk off indicators at extreme, except spot to move 100 points from a re-testThe last time PFG’s key market indicators were at these levels, the market was at 1080 and we had a major lift off. VIX went from 45 to 25 and we rallied 200 points. Now we are at midpoint of the latest extremes -1180 and VIX at 30. PFG believes this market is priced rich and vol will go higher for re-test of 1150 or lower before a rally can happen. The macro situation has gone parabolic and is much worse since the October rally, so we have to ask why are we 100 points higher while our risk off indicators are approaching extremes?
Could we sell off to 1150 with Dec VIX @ 35 and then a rally to 1250 leaving VIX@ 30 to finally finish at 1200 with VIX 32.5? Our indicators show this is very possible. One thing is for sure, we are not going to snooze in Dec.
1. Risk Off indicator back at Oct Lows- we started a one month 200 point rally
2. Financials showing again up at oversold levels, however they have room to go down before we see a rally. It will take them to move the index higher.
3. CDS spreads have stayed constant, people have been dumping bonds (de-leverging, spreads wider vs UST) - will that money find it’s way into the stock market? or are we going to see a more selling off in risky bonds? We could compare just Italian Yields with corporates to see that this market is broken.
4. Long/Short - same story, high correlation, however - again pointing to levels where the Oct rally started, but no edge either way
5. Vol using GLD and SPY seems rich and a rally could take VIX to 25 very very fast if a rally starts, however it is already cheap to current spot and we don’t expect this outcome.
6. VIX went from 45 to 25, currently we are 30.65 vs 1200 Spot, 1180 Midpoint of rally, 35 midpoint of vix, which if adjust for extremes by 5, we get 30 ish - so vol is fairish to a little cheap. Could a rally keep it sticky?
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