Sentiment, Energy, and Volatility: The Setup for the Next Leg Higher

1) SENTIMENT – Something interesting is happening beneath the surface. Consumer sentiment is collapsing to historic lows. People are angry, frustrated, and convinced things are falling apart. That combination matters. Because while consumers are more pessimistic than ever, consumer stocks are doing the exact opposite. All this anger and pessimism might be doing a lot more for this bull market than most people realize. If everyone were happy and confident that the world was a great place and making money was easy, that would be the real problem. That's what markets looked like in 1999, right before everything fell apart. Peak optimism does not show up at healthy moments. This is a broad consumer rally occurring while consumers themselves have never been more pessimistic. Perfect.

2) OIL – On Friday I pointed to $59.98 as an important potential pivot spot for oil.  WTI oil is now at $60.35…but one day doesn’t make a breakout.  If oil holds above this $59.98 area for a couple more days, we likely see the phase transition to bullish versus bearish.  That helps to solidify the growth-accelerating story as well.  A couple of indicators suggest that the higher probability is for oil to bounce around between the $56 and $60 level before it can really move higher.

3) IVOL – Implied volatility (IVOL) premiums and discounts are items I’ve pointed to plenty of times in previous morning notes.  There are times when IVOL trades at a discount, which usually indicates “complacency” by investors (tends to be bad for markets), and there are times when they trade at a PREMIUM, which indicates hedging via put option buying.  Or another way of looking at that is “fear”.  The old adage is that a “hedged” market doesn’t boil over.  So the times of IVOL Premiums are times to be invested.  Right now, the IVOL PREMIUM for the S&P 500 proxy (SPY) is sitting at 102% vs. 30-day realized volatility.  That is HIGH and has usually been indicative of a rally that is ready to release.  Just one week ago, that PREMIUM was at 53%, and one month ago, it was at just 25%.  Current VIX (volatility) indicators are also nowhere near other spots in market history that preceded a collapse.  You see that depicted below.  Notice where VIX was in 1999-2000 before that collapse and notice where VIX was in 2020 and 2022 before that mess.  Compared to today, those times had a much higher volatility value.