It always strikes me with curiosity that, when markets are at a crossroads, many super smart and savvy traders and investors start reaching for “expert” opinions. Of course, I understand that we hate uncertainty, as it creates doubt (and usually results in the wrong decision).
For those of us who have been long the market, uncertainty is always springing up. So far, it has been the right decision, but we keep thinking that the game has to turn at some point. 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. Year ago, I used to play the game, but my batting average trying to time a top or bottom was so abysmal that 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 will tell us when it’s time to change our strategy.
Picking stocks over the last few years has been a great bet. Today, correlations are low, which makes selection even more important than usual. However, I am not going to change my strategy, because the charts and technicals tell me more about the market than a pundit’s comment on Bloomberg TV.
We have to believe and trust in market signals, because they have come to be so reliable and accurate over time. The market always tells us the facts based on 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 moves based on patterns, trends, and behavior.
The best place to start is with the Fed Funds Futures and VIX Futures. These tools can help explain market behavior and provide insight on what we can expect down the road.
Fed Funds Futures
Much of the “expert” chatter last week centered on The Fed and the speech Fed Chair Janet Yellen gave on Friday. While most were trying to tease out clues from her comments, the Fed Funds Futures moved modestly into the hawkish camp. Regardless of rhetoric, the market the Fed Funds Futures told us that there is potential NOW for small, incremental rate hikes (see the link above).
The September and October future is now 100% priced for a 10 base points (bps) rate hike, while January 2016 will likely bring a second 10bps move. Beyond that we see acceleration in 2016, with a full 50bps priced in by May. I suspect the market is reacting to the Chair’s notion of a strong economy and better employment data. As always, the market looks ahead.
VIX Futures
As for the VIX futures, we see that 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).
As the SPX 500 is up 2% for the month (through May 22), and other indices are up solidly, there are some red flags in place. Complacency is high; the markets are ripe for some selling, which can be painful in the short term. Current conditions are dangerous if you are not carrying some protection, something that could be helpful if the sellers get active (which, by and large, we haven’t seen yet).
***
Start following the Fed Funds Futures and VIX Futures, and you, too, will start ignoring the pundits.
