Discussion
Since the Fed’s tightening program began in late 2021, Bitcoin (BTC) has acted as a fantastic leading indicator for stocks to the upside and downside. The one major failure was around the June 1, 2023 launch date for SPX when the Fed headed into blackout guiding to a “skip”. Everything took off starting June 1 despite BTC having fallen -18% ahead of that rally in stocks. There are a couple of key similarities today with how SPX/NDX are breaking out alongside improving breadth as the Fed enters blackout, despite BTC’s sharp decline. But critically, VOL and CDX do not confirm the advance.
IG CDX is refusing to breakdown to new lows as it did sharply around the June 1 launch, and the key VVIX/VIX ratio is currently breaking down, not up, as it did around June 1 last year. During a topping process stocks tend to make a bearishly divergent rally to new highs that sees breadth, sentiment, and VOL make lower highs. It appears that is what is happening today.
Fundamentally, the fact TIPS break-evens are moving up, not down, as they were around last June 1 is critically context to interpreting these divergences, as FED Chair Powell’s commentary on January 31 is likely to be the “excuse” for the 1Q24 correction down to circa SPX 4500-4600.
Exhibits
BTC is down -18% from its highs, typically a sign that equities are likely to correct in the coming weeks. June 1, 2023 saw this leading tendency fail, but further context suggests today is not the same set-up.
For one, IG CDX is not sharply breaking down to new lows as it did around the June 1, 2023 SPX launch date.
Second, unlike June 1 the critical VVIX/VIX ratio is not accelerating higher as it does in the early stages of a durable market breakout. In fact, it looks more akin to key bearishly divergent equity tops, most notably the 2017 “Volmageddon” peak.
Fundamentally, the critical difference between June 1 and today is the TIPS break-evens curve. Last June 1 break-evens were moving sharply lower, allowing the Fed to take a calm, market-friendly posture. Today BEs are moving sharply higher despite oil being on its back. As discussed yesterday, Waller’s speech last week was a key tell that Powell is unlikely to be equity market friendly on January 31.