Market Lab Report - Premarket Pulse 6/2/16
Major averages clawed back from early losses to finish slightly higher on lower, below average volume.
Global markets are relatively quiet suggesting that U.S. markets may also have a quiet day ahead of tomorrow's monthly jobs report. A strong report will push the odds in favor of a rate hike. The markets may respond bullishly if they believe this is a sign of a recovering economy, otherwise they may stumble as rate hike worries mount. U.S futures are moving lower ahead of the open as crude oil prices come off of their recent highs.
Bill Gross of Janus issued his monthly missive suggesting, as he has in the past, that we are in unchartered waters. He says risk/reward has never been higher for both stocks and bonds. But while this is true, we would suggest QE could continue to push stocks higher as "Don't fight the Fed" has turned into "Don't fight the Feds".
That said, while markets may continue onwards and upwards, the likelihood of them doing this at higher levels of volatility, ie, with sharp pullbacks, can be expected. We would therefore agree with Gross's point that buying volatility at the right time, ie, shorting the right stocks in the right positions, and using the VIX Volatility Model's BUY signals when it anticipates elevated levels of volatility would be prudent. Indeed, short positions can profit handsomely in rapid fashion, and the fast 15%+ gains the VVM has demonstrated a number of times in real-time (see report archives) since its beta was launched last August are testament to this. Thus the 15+% profit taking rule on its buy signals was put in place.
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