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Market Extremes to Take Stock of Heading Into the New Year

Market Extremes to Take Stock of Heading Into the New Year

2016-12-31 02:10:00
John Kicklighter, Chief Strategist
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Talking Points:

• Extreme historical - even record - highs/lows are prevalent in the financial markets through the close of 2016

• For 'risk trends' the S&P 500 has hit its record on five consecutive quarters advance will the VIX is at a 'natural' low

• Other remarkable moves include: GBP/USD record 6 quarter drop, biggest USD/JPY quarter rally in 21 years, record Treasury rally

See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.

We head into the 2017 with a number of extremes in the financial markets. That includes extremes positions (highs or lows), extreme consistency (momentum) and extreme speculative assumptions (such as complacency). We label things as 'extreme' for a number of reasons, but regardless of which aspect it pertains to; there is always a common truth to such circumstances: they are atypical and limited in duration. One sided moves are more likely to reverse. Extended periods of quiet are more likely to experience a surge in activity while an overly volatile area of the market is likely to cool. There are many such extraordinary positions in the market, but we focus in on a few in this video.

One of the most common themes for our discussions in 2016 was the bearings and persistence of risk trends. This is a universal influence, and its bearings will play a crucial role not only in what direction and assets we chose, but also the style of trading that is most appropriate. Among my favored benchmarks for this otherwise far-reaching and complex theme are the S&P 500 and VIX. The former soared to a record high through the end of the year and managed to climb for five consecutive quarter - a pace that draws skepticism when we see what it arises from. From the volatility index, frequent oscillations should be put into context with a natural low that we see with its full 26-year history around 10 vols - close to where it stood for much of the past year.

In the FX market, the Dollar has contributed much to otherwise remarkable developments. The ICE Dollar Index's move to 14-year highs was the motivation for the EUR/USD to make its break below 1.0500 to secure an equivalent historical low - though not much immediately came of the spark. Adding Brexit to the mix, GBP/USD fell a sixth consecutive quarter which matches the longest bear streaks in history - with precedence for remarkable turns. USD/JPY's performance was shorter but more concentrated with the biggest quarter's rally since 1995. Elsewhere, gold has posted its second worst quarter's slide in nearly 20 years and US Treasury yields notched a record jump through 4Q. What does this mean for trading in 2017? That is the focus of this year-end Strategy Video.

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