Weekend Reading: Yep… Still Looks Like A Trap

Courtesy of Lance Roberts of RealInvestmentAdvice.com

Last week, I noted technical breakout of the market above the downtrend line from last May, such a move required an increase in exposure to equity risk. Two weeks ago, I wrote,

“With the breakout of the market yesterday, and given that ‘short-term buy signals’ are in place I began adding exposure back into portfolios. This is probably the most difficult ‘buy’ I can ever remember making.”

I also stated that it was probably a trap and that I will be stopped out in fairly short order. But that is the risk of managing money.

Well, since then the markets have gone, as of this writing, roughly nowhere as the market traded between roughly 2075 and 2100 all week. However, the following chart is what has me worried. 

The chart of the volatility index measures the “fear of a correction” that currently exists in the market. As a contrarian indicator, the “time to sell” is when there is relatively little “fear” in the market.  As the yellow highlighted bars suggest, that time is likely now.

Is the recent turn higher in the VIX signaling a market correction as it has done in the past? Possibly. If so, the question will be the depth of that correction. Will it be a mild pullback as saw in early 2015, or a more major decline as seen in August of last year? My bet is that it will likely be the latter given the weakening fundamental backdrop.

However, given the ongoing Central Bank interventions, verbal easing by the Federal Reserve and an excessiveness of “bullish hope,” there is still no telling what the markets will do next. This is why in this upcoming weekend’s newsletter (subscribe for free e-delivery) I will be discussing the possibility of “shorting against the box.”

Keith Fitz-Gerald once wisely stated:

“Always sit in an exit row.” 

This weekend’s reading is focused primarily on the events from last week – The Fed and the markets. I suspect things are about to get much more interesting.

CENTRAL BANKING

• Dumbest Idea Ever Interview With Jeff Gundlach via Finanz und Wirtschaft
• Will The Fed Move The Markets Up Or Down? by Anthony Mirhaydari via Fiscal Times
• Global Tensions To Increase Before June FOMC by Marc Chandler via Real Clear Markets
• Will The Fed Taint The Election by Heather Long via CNN Money
• The Would Be Crazy To Raise Rates by Stephen Kalayjian via CNBC
• The Madness Of Negative Rates by Richard Rahn via Washington Times
• Treasury, Fed & The Next Meltdown by Ike Brannon via Real Clear Markets
• Surprise, Fed Was Wrong Again by Scott Sumner via EconLog
• What The Fed Statement Signals & Why by Mohamed El-Erian via Bloomberg
• FOMC Demonstrates Firm Grasp Of Obvious by Marc Chandler via Real Clear Markets
• Central Bankers – Let Them Eat Rate by Danielle DiMartino-Booth via Money Strong

THE MARKET & ECONOMY

• Is The S&P 500 About To Correct? by Brett Golden via MarketWatch
• Most Hated Rally Ready For A Correction? by Mark DeCambre via MarketWatch
• Smart Money Refuses To Buy by Tyler Durden via Zero Hedge
• Chart Says January Crash To Repeat by Ken Goldberg via The Street
• What’s Keeping This Market Up by Lucinda Shen via Fortune
• Mind The Stock/Bond Gap by Macro Man
• Troubling Signs For Big Tech by Michael Kahn via Barron’s
• The Slow Down Is Consumer Driven by Jeffrey Snider via Alhambra Partners
• Another Weak Quarter For US GDP by James Hamilton via Econbrowser
• The End Of A Golden Age by Brett Arends via MarketWatch
• Why Is Productivity So Weak? by Neil Irwin via NY Times
• This Indicator Is Still Flashing A Warning by Jesse Felder via The Felder Report
• Why The 10-Year Is Going Below 1% via Kessler

MUST READS

• The Ugly Truth Of $15 Minimum Wage by Ed Rensi via Forbes
• How Have Stocks Fared Over Last 50 Years by Bill Barker via Motley Fool
• Echoes Of 1999 by Rob Arnott via Research Affiliates
• Teetering On The Edge Of Recession by Ironman via Political Calculations
• Where The Worst Declines Come From by John Hussman via Hussman Funds
• Q1 GDP – Weak & Why by Michael Lebowitz via 720 Global
• SEC Begins Crackdown On Non-GAAP Earnings by Tyler Durden via Zero Hedge
• Something To The Positive Skew by Dana Lyons via Tumblr
• Krugman’s Fiscal Equivalent Of War by David Stockman via Contra Corner

“The market does what it should do, just not always when.” – Jesse Livermore