Time for a Major Change (Part 2)

Volatility and the fragility of markets.

A week ago, I wrote my key concerns as we move through the summer (here, here and here):

“This is what happens when crowded positioning goes too far. And it remains a problem, even after yesterday. […] Beware the unintended consequences of bad positioning and extreme risk-seeking behavior, especially when an important macro shift occurs.”

Additionally:

“The market is overbought in an extended Blowoff, and with big catalysts approaching.

Exacerbating the problem, liquidity is deteriorating — something we’ve only seen once before during a rally. Is this deterioration another early warning that something is changing?

Maybe nothing happens this summer, and everyone can enjoy a nice quiet break. But markets are overbought and fragile, it’s an election year after all, and elections are known for unusual Volatility to begin with.

So watch for clues that momentum may be fading — and with it, the possibility that a bigger Top may be under construction.

It could take a bit of time, but if momentum turns, the implications would be significant in my view.”

I believe we are witnessing a gradual, then classic “all-at-once”, regime change in global markets.

It first happened in Rates and then Currencies, as we’ve been discussing for weeks, and it has finally transitioned into Equities.

(This sequence is fairly normal, as Equities are traditionally the last asset class to “get the memo”.)

“When Stocks are going up every day, nobody cares about ‘Macro’. Then one day, Volatility comes back, and all of a sudden Macro becomes essential. But I believe Macro is always essential. I also believe we’re approaching a critical point in markets, where having a basic understanding of Macro history is absolutely essential for survival. Especially if liquidity and volatility start to shift.” (Link to report)

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WHAT’S NEXT?

Yesterday’s eruption in Volatility is a symptom of a much bigger problem in my view.

If the language of markets is change, then yesterday’s message was “loud and clear”: