Will Dow and VIX Continue to Defy Seasonal Norms in Q4?
- We are just a day away from closing out the quarter and an eighth consecutive quarterly advance for the S&P 500
- The VIX's station below 10 defines the foundation to the market's optimism - as well as its risk
- Dollar, Euro and Pound trends this week have hesitated with plenty of technical appeal resulting
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Typically, the end of the quarter is marked by rebalancing and easing on excessive, one-sided exposure. That wasn't the case through the close of the third quarter this past week. Already pushing a record high, US equities furthered their charge before the week, month and quarterly end. Perhaps the most remarkable performance comes on behalf of the S&P 500 which not only charged a record high into the close but generally closed out its eighth consecutive quarter advance for a cumulative 31 percent gain over the period. Neither growth, global capital flows nor returns have paced this climb in asset prices; but that still does not seem to be a concern for those market participants content with throwing in with the exuberance. Similarly, the VIX volatility index's push to 9.5 marks the extreme appetites prevailing in the financial system. This level would suggest a crystalline view of stoic markets through the coming month with no potential for North Korea, financial instability or economic trouble possible. It is the fear of missing out (FOMO) and moral hazard mentality that stands as the backbone for our markets today.
To suspect that outside forces (central banks or governments) can thwart any unknown developments to make us as investors whole is a profoundly complacent - and risky - view to maintain. Few would admit to that; yet as a market, the collective exposure leans this way. The mentality of 'taking advantage of trend while it is here' and confidence that those with risky exposure can identify a change in conditions to beat a hasty exit prevail. It should be said, that that is the belief held in all bubbles through history. Heading into the final quarter of the year, it is a good time to evaluate the risk-reward potential in throwing in with the complacency trade. Probability may favor it slightly, but the potential imbalance is increasingly extreme for disorderly deleveraging. I remain skeptical of the long equities and short VIX exposure that is so popular. Discounted 'risk' markets like Yen crosses are moderately better, but that doesn't make them 'good' trades under most circumstances.
With the look to the FX market into the new week and quarter; the US Dollar still holds the greatest potential. Its bullish turn is still uncertain and very early. This past week, the Fed's favorite inflation indicator (PCE deflator) ticked lower through the core reading, but that is unlikely to alter the upgraded conviction in policy tightening we saw over the past few weeks in rhetoric in deed. In the week ahead, there is another Yellen speech, the ISM's activity reports, NFPs and Moody's credit rating for the country. Yet, speculation will likely matter more. I still like the look of the EURUSD and GBPUSD positions I have taken, but momentum has flagged. USDCAD and AUDUSD deserve monitoring as well. For the Euro, the Catalonia referendum is seen as being a non-event, but that makes for a particular bearish skew if something does happen. Two currencies with technical and fundamental appeal moving forward are the Aussie and Canadian Dollars. The former has the RBA decision and latter week-end job statistics. Both are known market-moving events, but it is the context that truly matters. We discuss what kind of markets we are trading/investing in heading into a new quarter as well as trade opportunities that can solidify in this weekend Trading Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.