Equities Near Record Highs, But Risks of Volatility Mount

June 10, 2021 at 09:28 PM

As the Dow Jones and SP500 indices getting close to their all-time highs, while the Nasdaq 100 index is slightly lower than its all-time highs, the US stocks have been very calm over the previous weeks.

It wasn’t that hard to predict this kind of dynamic since equities are perfectly correlated to the Federal Reserve’s (Fed) balance sheet. Thus, should the Fed continue in its current monetary policy, stocks will most likely continue posting new all-time highs every month.

But still, traders can benefit from this short-term volatility. According to the VIX (volatility index), some downside risks for stocks are rising. The VIX has compressed into a tightening pattern (a falling wedge pattern) that implies an end is coming to the low volatility regime in stocks. 

And then there is this correlation when the VIX rises the sticks will probably go down and vice versa. So, if the VIX breaks to the upside from its large pattern, volatility could return to equity markets. 

The first stronger support for the SP500 index seems to be at around 4,200 USD. If that is broken, further losses toward 4,120 USD could occur. The index needs to stay above 4,000 USD to maintain the medium-term uptrend. However, bulls should try to create – and hold – new highs soon, or there might some frustration among the bullish camp and profit-taking, dragging stocks lower.

Again, it’s worth mentioning that any decline and uptrend can be a buying opportunity, especially with the Fed that does not plan on changing its monetary policy any time soon. 

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