This Rally Has Legs

This Rally Has Legs


Financial market volatility indicates that this leg of rally is setting up to extend. As, for now the beast has been tamed.

Over the last month + 3 trading days in which implied swings for the S&P 500 Index exceeded those for emerging markets stocks, the relationship has snapped to the norm. And after blowing out several times last year, the spread between volatility expectations on the NAS Comp, and the S&P 500 is also lowering.

The tempering of these indicators suggests that this January’s buying is more than the seasonal effect of investors returning from holidays with money to allocate, as most of that money is still on the sidelines.

It is a sign that things are returning to ‘normal’ and arguably the stage for a more sustained risk-on environment.

Despite the Fed’s gift of ‘patience’ to the Bulls this week investors are desperate for clues on the sustainability of risk appetite.

Hedge funds and ETF investors sat out the S&P 500’s best month in more than 3 years, they and other buyers are on the sidelines waiting enter the action.

At the close of Y 2018 the US turned into center of market worry the CBOE’s VIX made a rare leap above a comparable gauge for emerging markets.

This year, as stocks rallied, it has reversed with the VIX averaging less than 20 while developing market stocks price in higher volatility to come.

A Key metric is the spread between implied swings on the NAS Comp and the S&P 500 indexes moved in to normalcy.

While it jumped during recent earnings seasons for big tech names, the spread has actually been falling as software giants reported earnings and guidance.

The inference now is that the risk premium for big tech stocks has now normalized.

That being the case we see this next Bull market leg running North for the next 2 year as of now.

Note: The Federal Reserve Bank of St. Louis’ President James Bullard applauded the shift away from its policy of raising interest rates, saying that should help to ensure a solid US economy for the next 2 years.

“I think it set us up for a very good couple of years here,” Mr. Bullard said in a TV interview Friday. Mr. Bullard, a monetary policy voter in Y 2019, has been the most dovish Fed official over the past 2 years, arguing the US economy is stuck in a relatively slow growth regime with little inflation, so higher rates are not needed.

Have a terrific weekend

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