The market could see increased volatility due to some weird movements in the U.S. dollar and interest rates. Remember a few weeks ago when the market sold off? Well, we’re far from those lows now, and it’s pretty much “ancient” history for the markets. We’ve recovered from the “short volatility implosion” of early 2018 already, and it seems market participants are back to buy mode. However, with rising rates, this market should only be for renting. You probably don’t want to buy and hold anything for too long. I think there’s a big issue in the markets stemming from the U.S. dollar and interest rates still, and it probably won’t go away anytime soon.
Rising rates could increase stock market volatility
The reason for the plummet still remains a threat to the market. With the U.S. dollar falling coupled with rising rates, I think this could cause another large move in volatility and potentially cause the market to fall again. When there is fear of rising inflation, interest rates tend to rise, and we’re seeing that. When interest rates rise, bond prices tend to fall, this is just the nature of the bond market.
Now, this is because the Federal Open Market Committee (FOMC) has an inflation target of 2%. If inflation continues to rise, the FOMC should look to raise rates, which should appreciate the U.S. dollar. However, that’s not happening. Rather, we’re seeing a fall in the U.S. dollar with rising rates. Again, I think the heightened volatility when the markets pulled back over 5% in one week was attributed to these diverging factors.
Here’s a look at the U.S. Dollar Index on the daily chart:
Now, here’s a look at the CBOE 10-Year Treasury Note Yield (TNX):
This is not how these two charts should look like at all. You should see the U.S. dollar rising against other currencies, since rates are running higher. However, if you look at the two charts above, they’re moving in opposite directions.
Bottom line: Until we see rates dip coupled with a rise in the U.S. dollar, I’m not buying into this recent market rally. Rather, I’m looking for a move higher in the CBOE Volatility Index (VIX), also known as the “Fear Index.” I’ll be looking for spots to use options to express my bearish opinion on the market, and I may look to some options on volatility products. I’m going to stay on the sidelines and be very selective if I get into stocks because I really don’t trust the rebound.
Jeff Bishop is lead trader at WeeklyMoneyMultiplier.com and widely recognized as the Mensa Trader. He runs short-term trading strategies, using stocks, options and leveraged ETFs.