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August 6, 2019 – What to watch for in the markets

What should you pay attention to in the coming days?

Watch VIX and see how the price action behaves vs. the SPY. If VIX is hanging still while SPY is rallying, I would be very skeptical of the rally in SPY.

A VIX crush would indicate that fears in the markets have been subdued for the time being.

Also watch treasuries and IWM in the coming days. If IWM lags ahead of SPY, it could be an indicator of more selling off. Treasuries will give you and idea of (1) what kind of future rate cuts bond investors are pricing in (bond prices go up, yields go down) and (2) an opposite (bond prices down, yields up) move would be indicative of China selling off treasuries as part of this trade spat.

Why do I believe volatility is vulnerable right now?

We’re in the middle of a nasty trade war.

The US Treasury accused China of manipulating their currency. If they are manipulating their currency, then you should be less concerned. If China isn’t manipulating their currency, then that is a sign of weakness in their economy if they can no longer control their currency, which could have a ripple affect across the globe.

I believe that China is worse off economically than they are leading on, and this trade war is making the situation worse for them.

China could retaliate against US tariffs with more measure of their own.

There’s also the wild card of what President Trump decides to do next too.

Volatility is already sitting at a high level, and it wouldn’t take much to blast it off through the stratosphere.

Why is uncertainty crucial when it comes to asset prices?

The more uncertainty there is in the market, the harder it becomes to price assets.

Investors are faced with a lot of uncertainty, which is why markets have been sputtering for 18 months now.

There’s uncertainty about the global economy, interest rates, the China trade war, other trade wars across the world, and debt to GDP levels for those biggest countries in the world.

This uncertainty makes markets harder to price, and creates the potential for big sell offs followed by big buy rallies.


Author: Trader Court

CPA first, pivoted to python programmer focused on data science which I apply to my own stock and options trading.

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