Trader Talk

Is there a breakout developing?

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Is there a breakout developing?

It's early yet, but the news out of China — on top of modestly better earnings from JPMorgan — has traders talking about a potential for a breakout in the markets in the next several weeks.

Why? Because China has been a major source of market volatility, and if the positive China trade data is supported by additional data that will greatly change the tenor of the China discussion, which has been relentlessly bearish for over a year.

With other sources of volatility — the Fed, the dollar and oil — also less, well, volatile — there's now greater potential for a breakout than there has been in a long time.

You can see this in the collapse in volatility — the CBOE Volatility Index dipped below 14 this morning and is near a multi-year low. Volatility ETFs like the S&P 500 VIX Short-Term Futures Index have seen heavy volume in the last few months as traders have bought volatility to bet that oil, China, the Fed, the dollar or some combination would blow up the markets (VXX offers exposure to a daily rolling long position in the first and second month VIX futures contracts).

But those bets seem to be unwinding today.

To be sure, we are not there yet. New highs have been modest on both the NYSE and Nasdaq. There are no big breakouts yet in the global markets, though the FTSE All-World Index — a basket of stocks representing the global markets — is close to its highest level of the year.

Before everyone gets too excited, there are other risks sitting on the horizon. I highlighted two this morning:

1) political risk around the U.S. election and around the Brexit debate in the UK/Europe;

2) central banks ineffectiveness. Markets were EXTREMELY nervous last week when everyone saw the yen strengthening, despite efforts by officials to jawbone it down. Kuroda's credible is clearly at stake. This is not yet an issue for the ECB's Draghi or the Fed's Yellen, but it is a blip on the horizon.

Still, we are a lot closer to breakouts than many may be aware. The big breakout — a close above the May 21, 2015, historic high of 2,130.82 on the S&P 500 — is only 50 points away. That's only a few days of aggressive trading!