Complacency has been developing over the past weeks. As we have previously written, all global cross asset volatilities are down to rather extreme levels. Not using cheap optionality here, Fed tomorrow and then the Q1 earnings, as well as the many unresolved macro risks, seems rather greedy. Insurance is cheap at the moment.
There are a few early divergences unfolding underneath the bullish surface that is starting to make us feeling slightly uncomfortable.
Below chart shows one of the major divergences. The SPX versus the small cap Russell and the Transportations index has once again started to widen. This is not the kind of divergence you want to see after the massive bull run from Christmas lows.
The same divergence on the 1-month chart paints a clear picture.
Maybe all is great and the Fed will once again save the investor, but our main point is to not become complacent. Given the fact implied volatilities have come off so much, optionality should be used for various hedges.
Source; charts by Bloomberg