Markets sending bearish signals as S&P 500 enters bull market

U.S. markets seem to be sending bearish signals as the S&P 500 enters into a bull market run. Yahoo Finance markets reporter Jared Blikre joins Yahoo Finance Live to analyze market conditions and its impact on the U.S. dollar.

Video transcript

JARED BLIKRE: At this point with this another breakup here, I'd say the price action this year we're seeing a lot more trends than we were last year. And they're evolving a little bit slower. So the temptation to jump into the market at these higher levels is still quite there. A lot of fund managers, as I've been talking about. If they're flat right now, they're flat footed. They might as well be short. They're kind of forced. They're then being sucked into the market right now. So all things point to potentially higher prices in the indices. But nevertheless, there are some divergences that have evolved with respect to equities, that is stocks, and the credit markets, and treasury rates, that is the sovereign rates.

Here's the Russell 2000. You can see this breakout here, a lot farther did it go than, say, the NASDAQ would. But let me get to the volatility markets because one thing I've been keeping a very close eye on is the VIX, and that has been coming down quite sharply for equities. And there's an interesting phenomenon going on. I've heard some very-- I've heard different explanations for this. But let's also keep in mind that the market in large part-- a lot of these gains have been fueled by options expiration, the weekly ones, like we see on days like today. That's also affected the market.

Looks like my WIFI Interactive is a stuck here. But anyway, if you're looking at the VIX, it's basically-- there we go. It's at multi-year lows. It's back in the range we saw prior to the pandemic. This is sending all kinds of signals, bullish signals to systematic traders who follow rules. And it's just sucking them into the market even more. You compare that with the ICE BofA MOVE index, I'd say one similarity is that they're both going down, but the BofA MOVE index not going down by quite as much. And this is a five-year chart. I think it will be more instructive to look at a one-year chart.

So we are relatively elevated in the Treasury market, in the bond market versus equities. And I think that's kind of showing a divergence as well. The real test is going to be next week when we get that CPI report. And what the reaction is-- to it in the markets is a lower CPI. Is that-- is good news going to be good news for the market? Is a higher one going to be bad news for the market? It's going to be really interesting to see. So it looks like our final-- there we go. ICE BofA MOVE index definitely looking higher here. I think we want to talk about the dollar. So I'll save a little bit of time for that, guys.

JULIE HYMAN: Yeah. Let's do that, Jared. Talk to me about the dollar.

JARED BLIKRE: All right. Well, the dollar has been a thorn in the side of equities and a number of other markets. I'm going to see if I can get it up here, but it looks like I got a little bit of delay. Anyway, the dollar has been at times very strong. But it came off that strength, and it gave the markets a respite this year. I think in large part, that fueled or helped fuel, I should say, a lot of the gains that we saw earlier in the year. Now, in general, and we're talking about mega caps, these are the stocks that have benefited disproportionately from the lower dollar from lower rates. We could talk about that. If we did a reversal to the upside in the dollar, that's going to hurt these guys, right? And that's what we've seen historically.

So we've got to keep in mind that could come about. But also looking at the various currency crosses, one thing in particular I'm looking at is US dollar versus the Yen. The Yen has been incredibly weak. I'm just going to add a couple of comments here. The Bank of Japan may be finally forced to relinquish control over the yield curve. That would mean YCC is out the window. And that would probably lead to a very large strengthening campaign on the part of the Yen. That usually happens late in the business cycle. And so that's kind of a bellwether for equities too, if we see a huge strengthening in the yen. But we haven't seen that yet.

And then there's the Chinese government, which is trying to stimulate the economy in very narrow, narrow conduits. But if that doesn't work, they're probably just going to do a blanket devaluation like they've done in years past. So all of this fitting together. Lots of dynamics.