It was a risk-off week for global financial markets.
But as we argued in the latest monthly issue of VMF’s Strategic Asset Allocation, the bar is now very low for positive surprises.
And that matters.
Because when positioning is defensive, sentiment is fragile, and expectations have been pushed down far enough, it often takes far less good news than people imagine to trigger a meaningful move in the other direction.
That potential rebound could also come with an added layer of comfort: the S&P 500 is approaching an important support zone.
And when you go one level deeper, breaking the index down by sector, the message becomes even clearer.
Several of the market’s larger sectors are also now trading near support, which suggests that this is not just an index-level technical observation.
It is a broader market condition.
At that same sector level, the current leadership is also telling.
Energy has been leading, which is hardly surprising given the geopolitical events unfolding before our eyes.
But alongside that, the market has also been rotating into more defensive groups, particularly consumer staples and utilities.
That is usually what investors do when they want exposure, but want it with a helmet on...
And yet, we continue to stand by the claim that the bar for positive surprises is low. In fact, that view is reinforced by what is happening in the realm of implied volatility, and particularly in the VIX.
As you can see in the chart, the VIX has not only printed lower highs relative to last year’s Liberation Day episode, but the candlestick pattern surrounding both events is also notable.
In both cases, we see a dark cloud cover pattern emerging... a setup that could point to lower volatility in the weeks ahead, which in turn would be consistent with higher equity prices.
Still, we do not expect the next risk-on wave to look exactly like the last one.
In fact, we suspect it may come with an important rotation in relative strength... across geographies, sectors, and risk factors.
And if the Dollar pattern is any guide, that next phase may well prove more favorable to the U.S. than many currently expect.
Stay tuned.
Good investing!
Vasco Marques de Freitas, CFA, CMT
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