The Market's Treacherous Undercurrents: What Lies Beneath the Rally

We all remember those childhood summer days spent playing with a beach ball in the pool or ocean. 

There was just something exhilarating about pushing it as far as you could under the water and letting go - just to watch it shoot up in the air like it was shot out of a catapult. 

Unfortunately, the metaphor I'm using this joyful memory for is anything but in the current market. 

Let's take a look at the Chicago Board Options Exchange's CBOE Volatility Index (VIX), a.k.a. our Fear Index... 

For those of you watching the market rally the past day or so who think this is the end of the bad times, you'll likely convince yourself that the above chart reinforces that notion. 

It doesn't. This is the beach ball being pushed down underneath the water - in this instance the 20 level - and it's only a matter of time before it's unleashed and soars. 

Now, if we somehow break below that 18 level on the VIX, I'll pull out my airhorn and megaphone and yell, "Buy, buy, buy." 

But the trends I'm seeing in the broader market have me highly suspicious of that being the case. 

We're seeing light volume on the S&P 500 and Nasdaq-100 despite the rallies, which tells you skepticism is still high. 

For what it's worth, I'm going to wait a couple of days - at least until after the PCE announcement - before I close out any existing positions or open up any new ones in this market. 

But it's far from just the PCE that is giving me pause when I take a look at *gestures* everything going on. 

I read a headline last night that said the financials have decoupled from the market... 

As you can see based on those colorful lines, they tend to move in lockstep. 

What we are seeing right now is sort of like Bert and Ernie deciding they don't want to be roommates anymore. 

But every headline we're reading about it is saying it's not a big deal at all. Everybody's moving on just fine, we're not concerned. 

Still, it's hard to remember the last time I saw those two apart... 

Oh, wait, no it isn't. 

How about we take one more trip down memory lane... 

What you're looking at is a comparison of the relative strength of the SPDR S&P Bank ETF (KBE) and SPDR S&P 500 ETF Trust (SPY)... 

In the year 2008. 

That first little drop you're seeing around April was the first time the markets decoupled what amounted to a financial crisis. 

At the time, we heard, "Hey, it's OK, the financials are going to head over here for a little while they figure out this pesky mortgage thing. They'll meet back up later." 

That sort of Hakuna Matata approach certainly did them no good back in 2008, and it's going to be similarly harmful during the current circumstances. 

There is no sector of the market that accounts for a bigger slice than the financials. 

You cannot decouple that from the rest of the market. By their very nature, they're joined at the hip. 

No matter how counterintuitive it seems, this is the market sitting at the table of that infamous meme, surrounded by flames, muttering, "It's fine," with a smile. 

You won't catch me dead in one of those seats. I have been trading far too long to be tempted by this brand of hopium. 

This whole banking fiasco is not going to be a two-week blip on the radar. More like two quarters - at least. 

Just listing SVB Financial Group (SVB) as something you can trade again doesn't simply put it in the rearview mirror. No matter how badly people hope it does. 

As I talked about yesterday, keep an eye on commercial real estate (CRE). This is something that's going to have a big, big impact on financials sometime soon. 

Now, CRE's downfall won't be as swift as a bank closure. Instead, this one could bleed out by a thousand papercuts. 

That's why it's going to be critical that we remain vigilant and keep our eyes fixed on this. I've got a feeling there are going to be a lot of opportunities throughout the downfall. 

There's no doubt I'll be touching on this in the weeks to come on the morning show. But unfortunately, there's only so much time during those, and you know how Brandon likes to get me sidetracked. 

If you want to guarantee you don't miss a single step in this plan, the best way to do that is by joining my Night Trader service. 

That's where I'm drilling down furthest into this sort of thing to find the trades I'm talking about. 

Click here to find out more. 

The post The Market's Treacherous Undercurrents: What Lies Beneath the Rally appeared first on Penny Hawk.

About the Author

Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.

At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.

He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.

Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.

Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.

He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.

Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.

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