This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
June 24: Does monetary policy have things backward in this highly unusual cycle? Markets suffered only a fleeting blow from the Fed’s slight step back from uber-dovishness last week, as the bigger picture is that almost all central banks still have easy policies cranked to 11. The Bank of Mexico’s shock rate hike this week is an exception that proves the rule. The fact that 10-year Treasury yields are planted at 1.5%, even as core inflation spikes above 3%, and equities are again testing all-time highs speaks to the lack of fear of the Fed among market participants. And, while Chair Powell flashed a hint of concern about the persistence of inflation at this week’s testimony, his main message is that we still have a long way to go in the recovery, particularly on the jobs front.
But the opening question is aimed at whether monetary policy is the proper vehicle to get us to the full-employment destination. As widely covered here and elsewhere, 9 million U.S. job openings do not suggest that there is a demand problem. It is becoming increasingly obvious that supply issues are the constraint on growth, whether it’s hesitant workers, bottlenecks, shortages, or backlogs. Yet, policy is still set at maximum support for demand, with fiscal policy now poised to add yet another leg, via an infrastructure deal. Those central banks that are now gingerly stepping back—Norway, Mexico, and even Canada—are the few that seem to openly recognize this new reality.
A Deep Dive into VIX Futures
The McClellan Market Report
McClellan Financial Publications
June 24: Anyone can look at the VIX [
volatility index] to get sentiment indications about the stock market. That’s beginner stuff, although still pretty good. The real fun lies in going deeper into data that no one else looks at to find the fun insights.
This week [we’ll look at] the total open interest in VIX futures. VIX futures first traded in 2004, but didn’t really get going as a trading vehicle until around 2012. Normally, total open interest moves up and down with stock prices. It gets interesting when open interest moves too far in one direction or the other, or when the behavior changes.
In 2021, we are seeing a change in behavior. Total open interest has been falling since the peak in February, and is now down to the 200-day moving average, even though prices are continuing higher. This is the change in behavior that is so important to note. Since VIX futures first started trading in 2004, the important price tops for the S&P 500 have appeared when VIX open interest was well above its 200-day MA. I should clarify further that just being well above the 200-day MA isn’t enough to put in a top. Prices can keep going up despite such a condition.
Rather, having VIX open interest below the 200-day MA is useful for ruling out the possibility that prices are now at a major top. It is a missing-topping condition. So we have some assurance that there should still be a lot more [room] for prices to run higher. When we see hedge funds getting excited again about trading the VIX futures, and open interest numbers rising to well above the 200-day MA, then we can worry about a meaningful top for stock prices.
June 22: Total existing home sales fell to an annualized rate of 5.80 million units in May from April’s sales rate of 5.85 million units, a bit better than the 5.73 million unit pace we and the consensus expected. While the May headline sales number may have been a bit better than expected, the real May sales number is much worse than the headline number implies.
As our regular readers know, when it comes to the data on residential construction and sales, we have no use for the seasonally adjusted annualized headline numbers and even less use for any attempts at analysis based on these numbers, with our sole focus on the not-seasonally-adjusted data. The unadjusted data show that there were 528,000 existing homes sold in May, far below our forecast of 561,000 sales. While this is up from 513,000 sales in April, the 2.9% increase is much smaller than the typical increase for the month of May.
As has been the case for years, not months, lean inventories were once again a drag on sales in May. Listings of existing homes rose to 1.23 million units in May, a touch higher than our forecast of 1.22 million units, but this nonetheless left listings down 20.7% year-on-year. The median existing-home sales price rose to $350,300, the highest on record and a year-on-year increase of 23.6%, though the median sales price is being skewed higher by the mix of sales being increasingly weighted toward the higher price ranges given the dearth of inventory in the lower price ranges. While we do look for some relief on the supply front over the back half of 2021 to help blunt the pace of house price appreciation, affordability will remain an issue, particularly for prospective first-time buyers.
—Richard F. Moody
June 21: There is at least one emerging technology with the potential to be highly disruptive: quantum computing. At some point, leading-edge semiconductors (the tiniest and best performing) will reach a physical limit—chips can’t get much smaller.
Computers using quantum physics instead of traditional semiconductor architectures have performance capabilities and processing power that’s far greater than classical computers.
While it probably won’t become mainstream for at least another five years, quantum computing has the potential to transform everything from technology to healthcare.
The Cruelest Month for Stocks
Texas Capital Bank
June 21: Remember that June is one of the worst months of the year for stock performance. Somebody must be in last place. Friday’s [June 18] triple-witching day put the exclamation mark on stock performance for the month. Quarter-end portfolio positioning along with options expiration jolted most stocks lower by a percent or two. Each of the three Dow indices is in the red for June, with the recovery-oriented Transports faring the worst, -7% at Friday’s close. One quarter of the S&P 500 consists of growth-oriented technology stocks, and the sector helped the big index stay above water for the month.
The late June jolt may stick around. Most index charts in the very short term are in downtrends, but all remain in their consolidation areas that date back to mid-April. Year 2 of a Bull cycle should see bumps along the way. Stocks are less than 4% below all-time highs, and earnings forecasts are improving. Any summer correction should be a buying opportunity.
—Steve Orr, Greg Kalb
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