Navigating Volatility: The Ripple Effect – June 23

Embracing Transformative Shifts

In his thought-provoking 1993 essay, Vernor Vinge introduced the concept of the technological singularity, where artificial intelligence (AI) development reaches a point of exponential growth and unpredictability. As we witness advancements happening faster than expected, and technological progress becomes uncontrollable and unpredictable.  Certainly, we live in an interesting time.  There is genuine excitement mixed with trepidation amidst the uncertainty about what will come next.  Needless to say, it’s an exciting time to explore the potential impact on the market.

Contrarian Indicators: Signals Amidst Market Highs

As the AI rally has fueled the market to 52 week highs, contrarian indicators often emerge when the market is on a relative high, and we have some noteworthy ones to consider. The AAII market participant survey reflects a consistently bullish sentiment, but a recent slight downtick raises the question of potential trends.  The Fear and Greed Index remains at extreme greed.  The SPIKES volatility index is now below 13.  This is extremely low levels of volatility.  Additionally, the smart money-dumb money confidence chart, comparing the S&P 500, reveals a year-to-date high for dumb money and a low for smart money, historically signaling a market top.

Balancing Irrationality and Economic Reality

While the market can defy rational expectations, the good news lies in the strong performance of the economy. Everyday observations, such as crowded Costco stores and bustling malls, suggest that there are no immediate signs of a recession in our daily lives.  When the Yield Curve is getting further inverted, its not a warning sign.  The warning sign is when after an inversion it flips and starts headed towards the flatline. Furthermore, the resilient jobs market provides additional reasons for optimism. Although the odds of a weakening labor market leading to reduced consumer spending and a subsequent recession may exist, concrete signs are yet to emerge. For now, it’s crucial to focus on the technical aspects of the market, which demonstrate real growth and enthusiasm surrounding the AI trend.

Embracing Uncertainty and Envisioning Possibilities

As we navigate volatility and contemplate the future, Vernor Vinge’s words resonate: “The human brain is a biological computer. When we build a machine that surpasses it, what will it be like?” In this era of transformative shifts and unpredictable outcomes, we must embrace uncertainty and remain vigilant in monitoring market indicators. By staying informed, adapting to changing conditions, and being open to possibilities, we position ourselves to navigate the ripple effects of volatility and make informed investment decisions.