No Apocalypse Here: Equities Hold, Dollar Drifts, Volatility Behaves

1) GLOBAL EQUITIES – There was no panic in Global Equities.  Tuesday was a uniquely American thing brought about by the typical Trump tariff playbook that I outlined Tuesday morning.  Points 3 and 4 were Tuesday, and points 5 and 6 were yesterday.  As investors, we have to let the “end of the sovereign world” narratives about Japan, or wherever else, just fade away.  Don’t listen to the FUD (fear, uncertainty, doubt) narratives…they tend to be wrong, designed to get investors to do dumb things.  This is why being systematic investors is so valuable.  Anyway, the Nikkei (Japan’s stock market) didn’t go with that end of the world narrative, and was up another +1.7% overnight, along with their 30-year bond yield down 22 basis points.  Will their rates calm down further?  I don’t know.  Chances are they will be volatile for a while.  But Japan’s economic problems are not likely end of the world problems either. 

2) US DOLLAR – Whether or not international equities outperform US equities again in 2026 depends heavily, as I’ve written, on what the US Dollar does.  On Tuesday, the US Dollar Index (DXY) bounced off support.  Yesterday it hit the bottom end of TREND (again, TREND is the rate of change of price, volume, and volatility for a period of more than 3 months) and failed.  This AM, the US Dollar Index is down slightly, maintaining its current bearish (downward bias) trend.  If that continues, then we might have another 2017 on our hands (which was really the last period of international outperformance).  But, it is hard to bet against the US… especially in favor of Europe.  If you look at history, betting against the US has not been a good bet to make.  Specifically, as it relates to us, our more moderate model (Tiger) had a back-tested total return of 17.04% in 2017, and our aggressive model (Great White) had a back-tested return of 42%… so our models did just fine during that time.

3) VIX – The 1-day move in VIX toward 21 on Tuesday was what we call episodic-and-non-TRENDING.  Bears – investors who think markets are going down – get run over when U.S. Equity Volatility resumes its deceleration, like it did yesterday.  This is why understanding implied volatility (IVOL) PREMIUMS (hedged) and DISCOUNTS (complacency) is so valuable.  When IVOL PREMIUMS are as high as they have been (~100%), markets tend to not only not crash, but eventually rally.  It’s mathematical and mechanical.  Market structure continues to look fine.  Moreover, yesterday’s move came with total U.S. Equity Volume accelerating +22% vs. the 1-month average.  That also tends to signal that institutions were buyers.