Volatility separates the investors from the punters

Mathan Somasundaram

Deep Data Analytics

Local market started negative on US lead before currency lead bounce had global investors buying into our market to finish a positive day. There was something for everyone…

  1. USD turned negative after moving up on risk off trade and pushed AUDUSD higher 
  2. US inflation data kept bond yields rising 
  3. Silver squeeze kept retail and day traders chasing for silver exposure 
  4. Gold has started to march back up 
  5. Conservative political parties in the US and Australia are talking fiscal control after blowing out debt that won’t be paid for decades. 

Aussie housing data was solid but it was expected after RBA and government weakened lending standards to dangerous levels and boosted it with handouts. Nothing like sucking in the desperate first home buyers to boost a sagging cycle. China data was stable but weak and raised hope for more stimulus. Don’t expect too much from China heading into holiday season.

The local market was higher on miners and health care while industrials and utilities were the only down sectors. Global investors were buying market exposure and local fund managers were watching on the sidelines as turnover was lower than expected. The day flipped on a dime and sellers in the morning were made to look stupid at the rebound. This is classic late cycle volatility. The market is drowning in cheap money and extreme valuations. Markets are moving erratically while risk taking is reaching new highs. Erratic moves on elevated volatility in number of markets are a clear late cycle danger signal. Late cycle moves at extreme valuation will test investor appetite for volatility. Volatility separates the investors from the punters.

Let us look at a few signals…

  1. USD is above 50 day Moving Average for the first time in 3 months on risk off trade.
  2. S&P 500 breaks 50 day moving average for the first time in 4 months…like DOW JONES.
  3. US volatility index (VIX) is breaking bad…if it moves above 40, potential bashing ahead.

Comments on US market last close > US market was bashed again as extreme optimism is getting hit on multiple levels. You know things are crazy when Elon Musk tweets about Bitcoin. DOW fell 620 and NASDAQ down nearly same on %... then followed by S&P and then RUSSELL. DOW had the worst week since Oct. Bond yields, USD and Gold are higher. Every sector was red with Energy and Tech leading the falls while Gold was mainly flat and the only sector not down by at least 1%. European markets were bashed too. Asian markets are not going to be able to avoid the damage playing out in US and EU as China is slowing down into their holiday season. Vaccination rollout and supply issues everywhere. JNJ vaccine not stacking up. New variants are spreading outside their country of origin... may be starting pandemic variant 4.0 or is it 5.0...losing count of variants. All going well...no clarity till Q2 in developed nations. We continue to like Aussie gold miners and bear ETF as a hedge.

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 30 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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