Short Global Equities as Volatility Rises


Coming into last year I was looking for equity market volatility to rise from levels not seen since the 1960s, as well as a market decline. The floor in volatility did indeed rise and looks set to remain elevated in 2019 (and beyond). The 12-month average level of the VIX is rising back in-line with its long-run average, but still not quite there.

Using the often cited 200-day MA as a measuring stick for defining bull market and bear market phases, the long-term average for the VIX when the S&P 500 is above the 200-day is 16.6 and when it is below the 200-day MA the average value of the VIX rises to 27. You could say volatility is only starting to normalize by historical standards, which is a good thing for trading.

CBOE VIX Chart – Volatility Normalizes, to Stay Elevated: Daily Timeframe (October 2017 to December 2018) (Chart 1)

Top Trade Idea 2019: Short Global Equities as Volatility Rises

With regards to market direction, my confidence level in seeing a sharp break in equity prices is much higher than it was prior to 2018, with a decline seen as likely deepening well into bear market territory (-20% or greater). A 5-wave move from the 2009 low looks to finally be complete.

A drop to the bull market trend-line off the 2009 low will have the S&P down approximately 20% off the high (depending on the timing), but a drop to price levels not seen since the last bull market correction (2015/16) look to be in the cards as massive excesses get purged. If this turns out to be the case then the S&P 500 will be trading down to the 2134/1810 area, or 27% to 38% off the highs. I’m no economist, but a drop of that severity also means a recession will likely be upon us.

US S&P 500 Price Chart – Looking for Much Lower Prices: Weekly Timeframe (October 2008 to December 2018) (Chart 2)

Top Trade Idea 2019: Short Global Equities as Volatility Rises

The DAX is set to continue its woes as not only is it already further off the highs than the S&P 500 (severe relative weakness), but the size of the head-and-shoulders pattern dating back to June 2017 suggests a major macro top will have the German benchmark continuing to reel. The bull market trend-line off the 2009 bottom and lows from the 2015/16 correction, both around the 9k mark, are viewed likely to be met.

German DAX Price Chart – H&S to Lead to Bull Market Trendline: Weekly Timeframe (October 2008 to December 2018) (Chart 3)

Top Trade Idea 2019: Short Global Equities as Volatility Rises

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