US Dollar and Rates are Variables That Deserve Attention at a Time When Assets are Priced to Perfection

With the markets well ahead of the fundamentals and as money continues to chase performance, the ‘risk’ remains elevated.

Consensus or “crowded trades” can be taken as a contra signal because ‘when all experts agree, something else is bound to happen’. Markets have an uncanny knack for luring investors into a sense of complacency before unleashing the unexpected.

As they say, markets are most vulnerable ‘when the last Bear on the street turns into a Bull’. That’s not far from the current mood as more and more investors who chose to sit out are joining the bandwagon.

Shorting the volatility index has been an extraordinarily bullish and profitable trade due to the inherent leverage in options. Leverage is one of those things that works great until it doesn’t. Volatility is inherently mean-reverting which means when the risk/return is attractive, investors made truck loads piling on shorts at elevated levels.

However, exiting at the opportune moment is often very important. Retail investors have increased risk significantly since the March lows. Investors have not only taken on record levels of risk via speculative call buying but have also simultaneously increased margin debt to record levels.

There are two major risks to the entire ‘Bull market thesis’: Interest Rates and the US Dollar.