Here’s something you don’t expect to see: Stocks, bonds, the U.S. dollar, and the CBOE Volatility Index (the VIX) are all up this year.
That’s rare for a lot of reasons. For example, if bonds are up, that means interest rates are low. But if interest rates are low, then the dollar should generally weaken, because that makes holding dollars less attractive. Meanwhile, bonds and stocks often move in opposite directions, because bonds are seen as providing safety when times are tough. And when stocks rise, the VIX is expected to drop, as fewer investors buy protection against the market.
These relationships make it very unusual for all four types of assetstorise together. And that leaves the question: Which one – stocks, bonds, volatility, or the dollar – will break first?
Gina Sanchez, founder of Chantico Global, thinks stocks will be the first to break. In fact, she believes it has begun already, saying last week’s selloff felt more like a liquidation.
“Stocks are still vulnerable,” said Sanchez, a CNBC contributor. “August is going to be an key month for figuring out what happens to stocks, because we need to see if we are actually going to recover from this drop, or if this is a sign of something worse.”
As data comes in later this month, the market will determine whether or not the economy is on pace for a strong recovery next year. “We still have to take stock of where we are, and whether or not, we’re still on that uptrend,” Sanchez said. “Stocks are still vulnerable for right now, before bonds really get hit. The haven trade is intact.”
Mark Newton, chief technical analyst at Greywolf Execution Partners, agrees with Sanchez based on the technicals of the S&P 500.
“Stocks have already shown signs of starting to peak out and pull back just in the last couple weeks,” Newton said. “You saw that initially in Europe in the latter part of June/early July. And we started to see a real move to the upside, not only in the VIX, but the U.S. Dollar Index, and also Treasurys.”
Meanwhile, on the bond side of the story, higher American interest rates compared withvery low European ones are helping drive bond prices up, Newton said.
“When you look at charts of the U.S. Treasurys versus the S&P , you see a pretty meaningful divergence of late,” Newtonsaid. “U.S. Treasurys continue to rally… and U.S. stocks are now about 3.5 percent below the levels that we hit in the latter part of July.”
Newton said stocks are pulling back during a seasonally weak period for equities. “This is the one asset class that seems to diverging,” he said. “The dollar, if anything, is starting to accelerate to the upside. As well, Treasurys and the VIX should continue to move higher as stocks move lower.”
To see the full discussion on stocks, bonds, the VIX, and the U.S. dollar, with Sanchez on the fundamentals and Newton on the technicals, watch the above video.
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