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Link for this issue: http://tradingdiary.incrediblecharts.com/2020-09-19-markets.php
 

BIS: S&P 500 is "rigged"

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Analysis by the Bank for International Settlements suggests that Fed monetary policy accounts for roughly 50% of the S&P 500 rebound since the low in late March 2020 and 20% of the Euro Stoxx 50. Blue lines show the likely path of the index without intervention by the Fed and ECB.

BIS: SPX & Stoxx 50
"Stock markets price in long-term information, stretching far beyond the short-term cyclical fluctuation in the growth outlook. The recent rally in equity prices has attracted attention, among other reasons, for its possible disconnect from the underlying prospects of economies still reeling from the pandemic shock. In this box, we use dividend derivatives to decompose the US and European equity benchmarks into short- and long-term components, corresponding to the value of the short- and long-term dividend stream. Our main goal is to explore whether this dimension, together with depressed interest rates, sheds some light on the apparent disconnection. In line with the subdued short-term economic outlook mentioned above, we find that the short-term components of both indices have seen a limited recovery since March. The benchmarks' strong recent performance is thus predicated on steady gains in their long-term components. Moreover, these gains are related, to a large extent, to the drop in the term structure of interest rates that followed the policy response of central banks to the pandemic shock." (BIS: The short and long end of equity prices during the pandemic, Fernando Avalos and Dora Xia)

S&P 500 Volatility remains high, with 21-day Volatility forming a trough above 1%, warning of elevated risk. Past occurrences in the last 30 years have coincided with major market events, either a market reversal or disruption as in 1998, 2011 and 2015.

Twiggs Volatility

Conclusion

Stocks are over-priced and market risk is elevated.

Quote for the Week

Garry Kasparov: Propaganda

Disclaimer

Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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