Jaws GAP - India Vix vs US Vix

There is quite a bit of underperformance in Indian market volatility compared to US market volatility since the COVID-19 crash as indicated by the jaws gap below. This should resolve soon with an upcoming spike in Indian market volatility and a significant fall in the Nifty Index.

 

Inter Market Divergences

 With the stock markets hitting new highs some inter-market divergences have started to appear. Let's take a look at a few of them. The first chart looks at the SPX versus the Transports. You can see the marked divergence in the last few months with transports not confirming new highs in the SPX:

Next, we look at SPX vs Gold. Gold is a big beneficiary of liquidity in the system and often leads the SPX. Again there is a notable divergence developing:

Taking a look at SPX vs Crude shows a smaller divergence that has developed recently:

The AUDJPY currency cross is a good measure of risk appetite. Note the marked divergence developing:

Lastly, the SPX vs VIX chart reveals the VIX not making new lows for new highs in the SPX:

While these divergences may not matter with central banks flooding the markets with liquidity, once the liquidity shows signs of reversing, they may prove useful in determining what lies ahead.

Indicators that Matter

There is a plethora of indicators to track while evaluating financial markets. Here are some important ones:

1) The Chinese Yuan:

The Chinese Yuan is often a proxy for the risk on trade. Periods of strength in the Chinese Yuan as seen in the last 3 months, have often been accompanied by up moves  in risk assets such as stocks, commodities and emerging market currencies:

source:investing.com


2) The S and P 500 Price to Sales Ratio:

This is a key valuation measure and price to sales ratios greater than 2 have often symbolized over valuation while ratios lower than 1 have produced undervalued buy opportunities:

source: multpl.com



3) The Yield Curve:

The yield curve is a very reliable economic indicator and an inverted yield curve like we have now has often been followed by recessions or periods of rapidly slowing growth, while an upward sloping yield curve is often indicative of an expanding economy:

source: ETF Trends


4) CNN Money's Fear and Greed Indicator:

This is a sentiment indicator which is a combination of several sentiment indicators and indicates whether market participants are fearful or greedy:

source: CNN Money



5) The Skew Vix Ratio:

This indicator is another sentiment indicator and values below 5 tend to mark panic bottoms while values above 15 tend to mark complacent tops. This ratio has been making lower highs and lower tops of late suggesting that there may be one more panic bottom in the not too distant future:

source: Stock Charts

Why a Massive Selloff in Risk Assets Could be Just a Few Days Away?

First market breadth is diverging with the New 52 week high low indicator not confirming the recent retest of highs in the S and P 500:



High beta segment of the market such as the Nasdaq is beginning to under perform the broader market much like in 2000:



The Skew Vix ratio as shown on stockcharts has spiked into double digits recently suggesting high tail risk, which is often a precursor to rising volatility and a risk off trade set up:

All this as we are in the middle of an emerging market currency crisis much like in 1998 unsupported by a tightening FED:

Emerging markets currencieshttps://t.co/iMzAOoBsZ4 pic.twitter.com/1f4DfSdl1e

— Chart of the day (@macrovaluechart) August 16, 2018

Quantitative Tightening Update (June 2018) – 5 Fed Charts https://t.co/IvFzZqBq2c via @seeitmarket

— Stéphane Collot (@stephanecollot) August 16, 2018

Stock Market Panic Just Beginning?

Markets have been taking a turn for the worse on fears of a global trade war. A look at the Fear and Greed Index computed by CNNMoney shows that investor sentiment is hitting record lows:

However the Vix is yet to take out the February highs and suggests that there is no major panic yet:

Also the NYSE McClellan Summation Index (courtesy stockcharts) has just begun breaking down again following the recent rally and has more room to fall suggesting more selling ahead:

Taken together we probably are headed for more selling and panic that should take us a lot lower to the major break out zone of the S and P 500 near 2400 first before any relief rallies occur.

Market Signals for the US stock market S and P 500 Index and Indian Stock Market Nifty Index for the Week beginning March 12

Indicator	Weekly Level / Change	Implication for S & P 500	Implication for Nifty*
S & P 500	2787, 3.54%	Bullish	Bullish
Nifty	10227, -2.21%	Neutral **	Bearish
China Shanghai Index	3307, 1.62%	Bullish	Bullish
Gold	1324, 0.05%	Neutral	Neutral
WTIC Crude	62.04, 1.29%	Bullish	Bullish
Copper	3.14, 0.37%	Neutral	Neutral
Baltic Dry Index	1201, 0.42%	Neutral	Neutral
Euro	1.2307, -0.09%	Neutral	Neutral
Dollar/Yen	106.77, 0.98%	Bullish	Bullish
Dow Transports	10740, 3.94%	Bullish	Bullish
High Yield (ETF)	36.09, 0.25%	Neutral	Neutral
US 10 year Bond Yield	2.89%, 1.30%	Bearish	Bearish
Nyse Summation Index	164, 1023.97%	Bullish	Neutral
US Vix	14.64, -25.27%	Bullish	Bearish
Skew	128	Neutral	Neutral
20 DMA, S and P 500	2714, Above	Bullish	Neutral
50 DMA, S and P 500	2742, Above	Bullish	Neutral
200 DMA, S and P 500	2571, Above	Bullish	Neutral
20 DMA, Nifty	10420, Below	Neutral	Bearish
50 DMA, Nifty	10606, Below	Neutral	Bearish
200 DMA, Nifty	10140, Above	Neutral	Bullish
India Vix	14.52, 3.22%	Neutral	Bearish
Dollar/Rupee	64.93, -0.39%	Neutral	Neutral
Overall	S & P 500	Nifty
Bullish Indications	10	6
Bearish Indications	1	6
Outlook	Bullish	Neutral
Observation	The S and P 500 rallied and the Nifty fell last week. Indicators are mixed. The markets have made important tops. Time to watch those stops.
On the Horizon	New Zealand – GDP, China – Industrial production, Euro Zone – German ZEW economic sentiment, CPI, Switzerland – SNB rate decision, U.S – CPI, Retail sales, Oil inventories, Canada – Poloz speech
*Nifty	India’s Benchmark Stock Market Index
Raw Data	Courtesy Google finance, Stock charts, investing.com
**Neutral	Changes less than 0.5% are considered neutral

Image from marketwatch.com

The S and P 500 rallied and the Nifty sharply under performed last week. Indicators are mixed for the upcoming week. Quantitative tightening by the FED is yet to be priced in fully. The markets are still trading well over 3 standard deviations above their long term averages from which corrections usually result. Divergences in high yield and surging bond yields are flashing warning signs. An interest rate shock can’t be ruled out. Indian market volatility is still below US market volatility so there is complacency and some catch up left on the down side. The critical levels to watch are 2800 (up) and 2775 (down) on the S & P and 10300 (up) and 10150 (down) on the Nifty. A significant breach of the above levels could trigger the next big move in the above markets. You can check out last week’s report for a comparison. Love your thoughts and feedback.