Letting Out Some Steam, Index And Crypto Style

Have investors become tired of their favorite themes? Over recent weeks, we have seen:

  1. SPAC issuance grind to a near-halt after a record pace
  2. The Nasdaq 100 Index (NDX) fail to retest the record highs reached a month earlier
  3. The Russell 2000 Index (RTY) experience a 10% correction within 10 days after a record high close
  4. Bitcoin fell over 20% from its record high in less than two weeks
  5. Late day weakness in major equity indices like the S&P 500 (SPX) over the past few sessions

While none of these are positive signals, they are not necessarily all that negative either. At least not yet. Few, if any, would dispute that we had been experiencing a bout of speculative frenzy. It is not unhealthy to see some profit-taking in investment classes that had been seeing dramatic rises, especially if most of the major world indices are still higher for the year to date. The question going forward is whether this is part of a healthy and necessary nascent corrective process or the start of a changing trend.

It is always tricky to make a broad-based call based upon a few days of trading activity. What we will do instead is look at some of the macro factors that could influence markets beyond the short-term. 

Bear in mind that President Biden signed the $1.9 trillion stimulus bill into law exactly two weeks ago, on March 11th. Bitcoin hit his record high level over the subsequent weekend.  Over 90 million $1400 checks were directly deposited by March 17th. Does anyone care to guess when SPX last closed at a record high? I’ll give you a hint – it wasn’t just St. Patrick’s Day enthusiasm that pushed the market higher. Markets had been anticipating the arrival of stimulus and began pricing it in as the bill progressed through Congress. 

As early as February 17th, we warned that the passage of the latest round of fiscal stimulus could be a “buy the rumor, sell the news” event. At that time, we noted that the VIX futures curve was pricing in a significant rise in volatility for the spring and summer months. We attributed that to a combination of the “sell the rumor” mindset, combined with a fear that markets would experience drawdowns when traders and investors who had significant profits in 2020 had to pay their taxes. Let’s take a look to see how the market has changed its volatility assumptions since then:

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