Starting To See Some Early Warning Signs - John Rothe | Portfolio Manager, Quant, Tech Geek, And Sometime Superhero To My Kids

Starting To See Some Early Warning Signs

I have been keeping my eye on the VIX (aka the fear gauge) and bonds recently as the turmoil in the Middle East is causing oil prices to rise and investors are starting to look for a reason to sell. The US stock market has been on a tear this year. However, I am noticing more and more articles in the mainstream media about how overvalued the market it. While markets can remain overvalued for years, they can get spooked into a short term correction very easily.

The rising price of oil can drastically reduce the growth in a recovering economy. A sharp spike up in the price of oil has the equivalent impact of a rise in interest rates.

The other area of concern is the US economy. Economic numbers have not been all that impressive. As the stock market continues to rise and economic figures do not improve, numerous quantitative models used by money mangers will tell portfolio managers that it is time to sell and take profits. In addition, consumers are not feeling that great about the current recovery and how it is impacting their personal finances:

By watching the VIX and the bond market (I’m watching TLT), we can get an early indication of how investors are starting to react. The VIX has been quietly rising, however what is more interesting is that the MACD is about to give to go positive – a signal that is viewed by many as a buy indicator:

As fear rises in the market,  money shifts from equities into bonds:

For now, equity investors should be cautious while value investors may want to start looking at bonds again.

Disclaimer: I/my client(s) are long TLT and I may initiate further positions within the next 72 hours.

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