The S&P 500 is testing its broken post-2009 trend

Now What?

“Kick the can” is the favorite game of politicians confronted with a difficult decision such as extending the debt ceiling or negotiating an exit from the EU. In markets, this stall tactic typically acts to suppress near-term volatility expectations relative to those in the future, resulting in a steep upward slope in the VIX futures curve that signals our strategies to turn more aggressive.

With its abrupt dovish pivot in January, the Fed engineered perhaps the greatest can kick in VIX futures history, simultaneously suppressing volatility expectations at every time frame and flattening the entire VIX futures curve in just a matter of days. With its stubborn refusal to steepen even after the vertical S&P move and precipitous fall in VIX over the past few weeks, our system continues to signal caution.

At time frames longer than the last eight weeks, a cautious stance begins to make more sense. Even after one of its most explosive rallies in history, the S&P 500 index remains 5% below the all-time high set 6 months ago, stalled at its broken bull-market trend dating back to the lows in 2009 (see chart above) and almost exactly where it stood a year earlier. In the intervening period, the index has entered and then partly recovered from a bear market as growth continues to slow in the US and abroad. Despite this, after a few soothing words from the Fed, the VIX is suddenly implying not just some near-term stabilization, but smooth sailing the rest of the year. Only time will tell how far the can has really been kicked.

From FOBI to FOMO and In Between

With the crash phase neatly accruing to last year’s number, the YTD rally in equities appears all the more impressive and has quickly turned 2018’s “Fear Of Being Invested” (FOBI) to 2019’s “Fear Of Missing Out” (FOMO).

*Past performance is not indicative of future results. Smart Index and Alpha Seeker returns from sample accounts, net of 1% fee.*

A common symptom of FOMO, there appears to be selective amnesia regarding what has been “missed” in the S&P 500 over the last 6 months:

Cumulative loss of 3%
Above-average volatility
Bear market (20% drawdown)

Not without their own challenges over this brief period, our strategies have nonetheless managed to substantially improve on the passive indexing approach that has become popular during the market’s nearly uninterrupted rise over the past 9 years. If the recent past is any guide, it may be time to reconsider the benefits of investment strategy diversification.