Falling VIX Indicates An Easing Of Bearishness

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In his Daily Market Notes report to investors, Louis Navellier wrote:

Fed Steering Boat

Softer Fed Speak brings down interest rates, and stocks rally.

If there was any doubt that the Fed is steering the boat right now, yesterday put it to rest. Comments from Atlantic Fed President and Fed Open Committee member Raphael Bostic yesterday afternoon wherein he said that he didn’t think rates needed to go materially higher than currently planned and that a pause by early to midsummer made sense to him. These comments led to an immediate drop in the surging interest rates and stocks rallied strongly.

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The rally continues today as interest rates have further softened. It isn't an irrational reaction inasmuch as the level of interest rates influences stocks in 3 ways; P/E multiples, earnings growth, and the attractiveness of fixed-income alternatives, in particular short-term cash equivalents instead of stocks.

Easing Of Bearishness

The S&P had fallen below 3,950 and was testing an important technical level and now has moved up well above 4,000 and may test a resistance level all in less than 24 hours. We seem to have entered a new trading range of 4,025 - 3,950 as the uncertainty of where interest rates will top out has left investors more reliant on technical analysis. It's important to note that the VIX has fallen to 19 and has been falling for a couple of weeks, indicating an easing of bearishness.

As the day goes on, the 2-year US Treasury yield is erasing its pullback, though the 10-year is still down 8bps and back above 4%. Stocks seem to be reflecting the steps of the bond market. The US dollar index is climbing off the lows of the day but is still below 105. Precious metals and energy are higher perhaps in reaction to the news that China is talking about 5.6% growth going forward with the help of a 3% budget deficit.


Best Strategy

The bears thought we were going to break 3,900, and are licking their wounds today, but for now, new highs still appear to need a definitive Fed pause.

Selling speculative names on the rallies and buying quality names on the pullbacks looks to be the best strategy for the time being as we bounce between technical highs and lows.

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