Market Dynamics: Healthy Rotation or Late-Cycle Squeeze?

1) VXN – VXN is the “out of the box” Nasdaq volatility tracker, similar to VIX for the S&P 500.  VXN has been hovering around its highest level in two years for the past three weeks.  The reason is pretty clear - the AI “killer” narrative and aggressive AI spending by AMZN, META, and GOOG, while profits from that still look far away.  This isn’t a black swan.  It’s a repricing of known conditions.  When volatility expands for identifiable reasons - not unknown shocks, our models tend to be very comfortable owning the risk.  Several of the MAG7 names are very oversold at this point.

2) SILVER – Silver is still struggling, mostly because Silver Volatility is still sky high at 72.91 (VXSLV).  It’s going to be hard for Silver to gain any real upward traction with its volatility that high.  Right now, Silver is below the low end of its TREND range (90.63 – 79.65) at 76.91.  That makes 4 days in a row now that it is below the low end of its TREND…putting it into a bearish (downward bias) trend condition.  The daily TRADE range is super wide (reflecting high volatility) at 87.68 to 51.29.  It’s not the time to buy an asset in a bearish TREND, with a low end of the daily trade range way down at 51.  Again, the likelihood is that Silver stays volatile, but for investors that own Silver if this rallies toward $90 and fails…I’d think about taking profits and waiting for a better, less volatile entry.  Gold is still bullish TREND with resistance at $5070.  It has been bumping up against that resistance area since it broke down through it on JAN 30.  Gold volatility (GVZ) is also elevated at 33.24.  If it does not fail at the 36 area, gold will also not likely break above that $5070 area.  That means that Gold, while bullish in TREND, still likely consolidates until it can see its volatility break down in a meaningful way.

3) SPLIT – Some groups are grinding to new highs. Others are stalling out. The headlines want you focused on whatever mega-cap stock is down 3% this week.  Meanwhile, entire sectors have been quietly breaking out for months.  Is this normal, healthy rotation inside an ongoing bull market?  It is if former laggards can play catch up, leadership changes hands and participation expands.  For that to happen, the underlying health of the market has to remain intact.  For nearly 130 years, one of the most reliable gauges of the primary trend has been the relationship between the industrials and the transports.  It's a framework built on the idea that goods need to be produced and shipped, and if business is expanding, both should confirm.  The Dow Jones Industrial Average and the Dow Jones Transportation Average have been doing exactly that.  The transports, which began life in 1884 as the Railroad Average before evolving alongside trucks and airlines, have just resolved a five-year base to new all-time highs.  It's hard to build a bearish case when one of the most economically sensitive indexes in America is doing that.  If this is not healthy rotation, but instead a late-cycle squeeze before a rollover, the transports will tell us.