Monday, January 11, 2010
I'm updating these charts because they have been very impressive for a long time and bear watching very closely. Implied volatility in equity options continues to trend down, helping equity prices to trend up, something I have been noting since late 2008. The recent strength in the dollar (note that the red line in the second chart moves inversely to dollar strength) has not derailed the rise in equities, contrary to the very popular view that the equity rally is just part of a larger "carry trade" that only works if the Fed keeps rates low and the dollar declines.
This rally is built on solid economic fundamentals, in short. But I see so many analysts arguing that this is all a house of cards that is set to collapse for any number of reasons (e.g., huge commercial real estate vacancies, a second wave of home mortgage defaults, an inflating credit bubble, the winding down of fiscal stimulus, rising tax rates, soaring Treasury yields, etc.) So many people are worrying these days about all the things the might go wrong, yet so few people seem to worry about all the things that might go right. This is how major bull markets always work: the market climbs a wall of worry, and ignores the fundamental drivers of the recovery.
Posted by Scott Grannis at 2:35 PM