It always strikes me with curiosity that when markets are at a crossroads we start reaching for expert opinions. We hate uncertainty, which creates doubt and usually the wrong decision. For so many of us being long the market has been the right decision, yet the game has to turn at some point, right? And who wants to be left holding the bag when everyone else has cleaned house. How do we get out of the way, and when will we know it?
That, of course is a market timing bet – and as a stock picker I abhor trying to time the market. My batting average trying to time a top or bottom years ago was abysmal, and I soon realized it was just a loser’s game. My advice – stay away from the prognostication game and stick with stock picking in the right environment. The market tells us when it’s time.
We have been in a great spot for picking stocks over the last few years, correlations are low, which makes selection the utmost importance. The charts/technicals are my guide here as they tell me more about the market than a pundit’s comment on Bloomberg TV. We have to believe and trust in the market signals because they have come to be so reliable and accurate over time. The market will never lie and always tell us the facts as presented by past activity and behavior. With a leap of faith you can decipher the meaning of market moves and project the next time frame for price based on patterns, trends and behavior.
Two Key Tools To Watch
So, as it relates to market information I will focus on two structures we have talked about prior – Fed Funds Futures and VIX Futures. These tools may help explain the market behavior and further give us some insight of what we can expect down the road.
Much of the discussion this past week centered on the Fed and some speeches, namely the one Friday by Chair Janet Yellen. While most were trying to glean some clues from her comments the Fed Funds Futures moved modestly into the hawkish camp. Regardless of the rhetoric applied by Yellen or other Fed Governors the market is telling us the situation. The futures market is seeing the potential now for small, incremental rate hikes (see the link above).
The Sept/Oct future is now 100% priced for a 10bps rate hike, Jan 2016 for a second 10bps move. Beyond that we see acceleration into 2016, and a full 50bps priced in by May next year. I suspect the market is reacting to the Chair’s notion of a strong economy and better employment data to come. As always, the market looks ahead.
The Bottom Line
As it relates to the VIX futures, we see the market is complacent about risk. With a 12% volatility reading there is little worry about market rumbles in the short term, and with futures priced accordingly the term structure is in bullish form. The normal contango condition exists in the term structure of the futures, so the expectation is for future volatility to be higher. Yet, bets on future volatility have rarely paid off except for short instances.
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