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Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

Summary:
Stock market surge everywhere Stock markets around the world – particularly in Asia – continue to surge. The average country’s stock index is 18% above its 200 dma! This is the highest reading in over a decade: *I calculated this average using the following countries’ indices: U.S., Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, HK, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, UK, Brazil, China, India, South Korea, Mexico, Taiwan, Russia. When so many stock markets around the world surged in the past, the S&P 500 (which accounts for approximately half of global market cap) usually rallied a little more over the next 3 months, followed by a sharp pullback. High volatility is to be

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Stock market surge everywhere

Stock markets around the world – particularly in Asia – continue to surge. The average country’s stock index is 18% above its 200 dma! This is the highest reading in over a decade:

*I calculated this average using the following countries’ indices: U.S., Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, HK, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, UK, Brazil, China, India, South Korea, Mexico, Taiwan, Russia.

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

When so many stock markets around the world surged in the past, the S&P 500 (which accounts for approximately half of global market cap) usually rallied a little more over the next 3 months, followed by a sharp pullback.

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

High volatility is to be expected in the coming months. The overextended rally can overextend even further, but nothing lasts forever.

Record Gamma

SqueezeMetrics publishes an excellent indicator called Gamma Exposure. In a nutshell, Gamma Exposure refers to the sensitivity of existing option contracts to changes in the underlying price (of the S&P 500). High values are bearish and low values are bullish.

It’s better to look at Gamma Exposure as a ratio vs. the S&P 500’s value. Here’s what happens if we divide Gamma Exposure by the S&P 500, and then take a 10 day moving average:

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

This is a bearish reading. When this happened in the past, the S&P fell -7.3%, -7.9%, and -31% over the next 2 months from where the S&P was as of that date:

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

Treasury bonds falling

The 10 year Treasury bond ETF TLT’s 14 RSI fell to the lowest level in more than 2 years:

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

Historically, such extreme oversold readings were not short term bullish signs. Instead, TLT usually washed out oversold momentum before heading lower over the next month:

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

U.S. Dollar Reversal

The U.S. Dollar rallied 4 days in a row from a multi-year low:

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

As a result, many contrarian traders believe that this the start of a long overdue rally. Historically, this wasn’t always the case:

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

But perhaps this time is different, given that speculators are historically bearish towards the Dollar:

Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

My market outlook

Here’s my market outlook based on 3 different time frames:

  1. Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
  2. Medium term traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
  3. Short term trend followers should continue to ride the bull trend because no one knows exactly when it will end. In a highly speculative environment like today, the most profitable traders are short term trend followers who trade markets with strong animal spirits. If you are a short term trend follower, you must use stops.
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