Wednesday's Market Minute: Bulls Are Hoping This Five-Year Trendline Breaks

Netflix NFLX plunged and recovered almost immediately after earnings Tuesday, the latest sign of determination by bulls to erase last year’s bear market. It’s looking like dreams of a full recovery could come true. Apple AAPL is less than 10% off its record from late 2021. AI has completely usurped the hype throne from blockchain and metaverse, and it’s grounded in some actually practical uses. 

On the flipside, the market’s expectation for the Federal Reserve to cut interest rates seems as outlandish as ever. Inflation has slowed down, but is still much too high, and the popular theory that the tech-bank blowup in Silicon Valley would derail the economy has been quickly disproven. Financial conditions are back to their loosest in a year, housing is robust, credit spreads remain innocuous, and equity valuations are soaring. These are all things that work directly against the Fed’s objective. 

The best possible outcome is that these positive forces keep the economy chugging along without reigniting inflation. That seems unlikely, given much of the supply-chain pressure on prices has already been relieved and that American wage-gains are now outpacing inflation on an annual basis. 

I’m watching one chart that I’ve been following for years to know if this bullish dream is coming true: the VIX. A lot of people don’t realize that the volatility gauge has been steadily trending higher since long before COVID – 2018, to be exact. It began when the inverse volatility ETFs blew up and the short vol trade caved in on itself in the event some call “volmageddon” in the lead-up to the first attempted tightening cycle back in 2018. I believe there is probably something very crucially symbolic about this trend, but that’s for another discussion.

What matters now is whether the higher weekly lows in the VIX that have held for more than five years start to break. Like any other trendline, the bigger the base, the bigger the deal it is when it breaks. I’d be convinced if VIX touches below 15 – a really meaningful lower-low in the chart – that we are truly headed back to a more calm, measured, bullish regime.

If the line holds, a big breakout to new highs probably isn't in the cards. But if it breaks, bears are going to be in dire straits.

Image sourced from Shutterstock

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