Ok, I’m going to try something new: a post that’s short, concise, and to the point. I’m inherently skeptical about the effectiveness of such things, but here goes.
Do you know what bailed stocks (NYSEARCA:SPY) out on Monday?
I’ll give you a hint: it wasn’t USDJPY, the market’s tried and true go-to ignition mechanism when things are starting to look sketchy.
I’ll give you another hint: it wasn’t 10Y yields, which hit their lowest level since late February early in the session and meandered around after that.
It was, in fact, the VIX (NYSEARCA:VXX), which was suddenly monkeyhammered back to a 12-handle in late afternoon trading:
Why should you care? Well, remember what I said on Monday morning about how the only way buying stocks at historically elevated multiples works is if volatility remains suppressed?
Here’s the graphic for anyone who missed it:
So, what you’re looking at there is the box outlined in black. The only way the probability of a 10% selloff in stocks stays below 21% when Shiller P/Es are in the 80-100th percentile versus history is if volatility stays in the 0-20th percentile.
See why that’s relevant given the second chart shown above?
Well, consider that and then consider these two charts out Monday afternoon from Goldman:
Q1 was the calmest first quarter in history in terms of average VIX level. It was the fourth calmest Q1 in history in terms of realized volatility.
Here’s some color from the bank:
While the VIX has only been around since 1990, we can use SP 500 realized volatility to provide broader context. SP 500 calendar quarter realized volatility was 6.69, the 4th lowest Q1 since 1929 and lowest Q1 since 1965. SP 500 realized volatility over the first quarter of 2017 ranked in the fourth percentile across all quarters back to 1929.
Now you know what you really need to be watching if you want your equity portfolio to remain buoyant and resilient in the face of falling yields and a yen that’s bid on safe-haven flows.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.