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The key to markets the last two sessions has been the rally in bonds and decline in yields. The TLT has rallied 1.75% Friday and Monday from extremely oversold conditions. As a consequence, the NASDAQ, home of Growth/Tech, has rallied 2.00%. In all likelihood, however, this is just a bounce as inflation is here and the Fed is not planning on taking action to contain it (“A Fed With No Fear Of Inflation Should Scare Investors”, James Mackintosh, WSJ, March 22, 2021[SUBSCRIPTION REQUIRED]).
Also encouraging the bulls is the VIX closing down 10% yesterday at 19 – below the significant 20 level. As you can see, to Katie Stockton this means that we have left the high volatility “COVID-19 Regime” and entered a new and more benign market environment. The Chart Reports analyzed Katie’s chart this way:
As Katie points out, VIX under 20 is evidence that we could be transitioning back into a low volatility regime. These volatility regimes can persist for a while. Take a look at years like 2013, 2017, and 2019. The VIX was in a low volatility regime (barely closed above 20) while the S&P 500 steadily marched higher.
Propelled by the rally in bonds and reflected in the decline in the VIX, Growth/Tech has rallied the last two days encouraging the bulls into feeling like the bull market is resuming and the coast is clear. As you can see in Drew Well’s chart, Growth has bounced versus Value at support. Greg Rieben’s chart shows how Growth/Tech as represented by the QQQ has outperformed Reopen Value in the form of XLF and XLE over the last two weeks. The question is if this is a bounce or the resumption of leadership by Growth/Tech.
If it is the latter, the bull market is likely back on and it is only a matter of time before the NASDAQ is making new All Time Highs. Conversely, if this is just mean reversion, it is likely that this is just a bounce in a new bear market as Mega Cap Growth, Speculative Growth and even Reopen Value are all looking like they are peaking leaving the market no legs to stand on.
The latter is my belief until the NASDAQ proves to me otherwise. When I said “The Bounce Is Here” on Saturday March 6, I thought the NASDAQ would retrace from 2/3 to 3/4 of its losses. Since it went from an intraday high of 14,200 in mid-February to an intraday low of 12,400 in early March that results in a range of 13,600-13,750. My original plan was to cover my shorts with a close above 13,750 as that would show my idea of how far the bounce could go to be incorrect. It sill has some work to do to get there.