Less uncertainty, elevated volatility, overseas breadth

Now that vaccines are being distributed, Biden is president, and the global economy recovers, the U.S. Economic Policy Uncertainty Index is falling after a historic surge last March.

The Uncertainty Index has dropped below 100 for the first time in almost a year. Historically, long periods of high (but easing) uncertainty led to more gains for stocks:

VIX

Speaking of prolonged periods of uncertainty, VIX’s streak above 20 is its second longest in history:

 

Given the way markets are rallying nonstop, this could lead to a melt-up before a melt-down. That’s what stocks did in 1999:

Overseas breadth

Breadth is extremely strong overseas. 93% of Japanese equities are above their 200 day moving average:

Even in Japan, this usually led to more gains for equities over the next 6 months:

Conclusion: market outlook

Here’s how I approach markets based on 2 different strategies & time frames.

  1. Short term trend followers should continue to ride the rally because no one knows exactly when it will end. If you are a short term trend follower, you must use stops.
  2. Medium term contrarian traders should go neither long nor short. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.

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