Volatility has finally made a comeback this week. But, after an initial downturn prompted but Trump’s tweets on trade negotiations with China, the S&P made an impressive comeback on Monday. While markets seem to be heavily overbought, the technical outlook will deteriorate only if important psychological resistance levels are violated. This is not the case for now. Specifically, the S&P500 managed to bounce back from the 2900 level every time it got even close to it (present level, 2875 confirms the thesis below). On the other hand, 2950 would signal a double top. That certain is a narrow range to deal with. (The situation is similar for the Euro stock and the Dax at 3550 and 12500 respectively.)
The world is probably not at a T junction (as defined by Ray Dalio in his book: The only game in town were he describe the necessity of an innovative view of a capitalism less dependent on central banks) but, probably is at a crossroad or a flex point.
A more detailed analysis of VIX dynamics shade a light on the near future. Trump firing off threats at these market levels, post China holiday and with UK markets on bank holiday prompted some profit taking by retail investors. Institutions, in general, did not react. VIX +40% at Europe open was in line with -2%, vol spike however did not realise as markets did not believe the tweets and rallied afterwards.
Today, the White House confirmed the threats but VIX almost did not react pricing-in a small move for the S&P. If we look back at the same levels in Q3/Q4 last year, in that occasion the market capitulated at a similar threat. In few months made a complete U turn, why? It doesn't believe that with high tariffs the global economy will not slowdown catastrophically. It is not a matter of being either bullish or bearish, my point is that having markets at these (high) levels and volatility this low is incompatible. One of the two is wrong. Personally I’m stepping aside this game of chicken and wait.
Have a look at the chart below showing the S&P500 with his 200 days moving average vs VIX (inverted with its yesterday spike)if the relationship between the two were to hold it would imply S&P -5% heading back towards 200dma.