Summary:

  • As previewed in our June 2 note (“Volatility is on the cusp of another “Buy” signal for stocks) another new signal in our models was triggered last week. Our Trend1 model is a trend-following model we apply to credit spreads, volatility, indexes and other metrics we track, and the S&P flipped from a “2” to a “1” on Trend1 on June 16 when its 200-day moving average sloped up. (Trend1 is a FlowPoint trend-following model that ranks stocks 1-4; 1’s are deemed “best” and 4 as the “worst”).
  • The Trend1 change in the S&P 500 confirmed earlier signals from our Credit (Buy signals in March and June), Volatility (Buy signals in June and July) and Momentum (Buy signals in April). Credit spreads and volatility continue to drop, a positive backdrop for equities.
  • On July 17, 2020 the CBOE’s Volatility Index (VIX) undercut its 200-day moving average and has now dropped -70% from its March 19, 2020 peak. BBB credit spreads took out their 200-day on July 1, and credit default swaps are not far behind. The Fed’s participation in the bond market is a significant driver of this trend, and while the bears will point out “this is unnatural” we also recognize that the Fed’s presence is not to be underestimated. Take our market signals at face value.
  • The global equity market picture is less sanguine. Applying Trend1 overseas, only two other country stock markets are ranked “1” – Switzerland and Taiwan.

Our volatility model flashes a Long signal for U.S. stocks when it tracks below 24% annualized volatility because there are no low-volatility bear markets in the U.S. See our prior piece on this topic here.

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