Generally, the well-known trading adage “Sell in May and go away” works, as long as you re-enter the market at the right time. This year however, the markets have been strong and are higher today than they were in May, driven primarily by the strong rally in July.

As we can see on the Seasonality Chart below, a July rally is the norm, not the exception. Based on data from the past 20 years, it is the month of August that typically sees a strong correction. September tends to follow with a rally to start the month, then sell-off into October. It is mid October where we generally see the market pick up again, with a year-end rally.

We are still long, but just entered an “insurance” trade in case we do get that seasonal correction heading into September.

Stay tuned!

Mariam Webster’s definition of Complacency:  marked by self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies :  marked by complacency :  self-satisfied a complacent smile

The VIX volatility Index measures the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the “investor fear gauge.”

A VIX reading above 30 indicates that investors are nervous, fearful, and risk-averse, concerned that the markets will decline. While readings under 20 indicate that investors are complacent, risk-tolerant, and optimistic that the markets will run higher. As we can see on the VIX charts below, investors are more complacent/optimistic today than at almost any other time in history.

Another indicator that we need to pay attention to is that the S&P 500 seldom deviates more than 7% from its 200-day Moving Average. As we can see on the following chart, once the S&P 500 deviates up or down more than 7%, we tend to see a correction the other way. Today the S&P 500 is trading at 6.91% higher than its 200-day MA, suggesting a correction is coming.

A few months ago, we highlighted how Illinois was broke and that it would soon be the first state to have a junk bond rating. After all, the state has gone over two years operating without a budget.

The state is in shambles, running up $15 billion in unpaid bills, and according to CNN Money Watch, Illinois’ unfunded pension liabilities increased 25% in one year to over $250 billion.

In an attempt to raise revenues, the state officials did what all politicians and bureaucrats do, they raised every form of tax and fee possible. In fact, their proposed solution to overcome their $6 billion budget deficit is to raise taxes by $5 billion, or $1,125 per household per year.

The problem there is that people are leaving Illinois in droves. In 2016, almost 90% of all Illinois counties saw their population shrink. For the third year in a row, Illinois leads the US with the number of residents leaving the state. The population of Illinois is now the lowest it has been in a decade.

It is not just residents that are leaving, as businesses say they are being hit with a perfect storm of regulations and tax hikes this summer, putting a damper on hopes for business expansion and jobs growth.

“Earning a profit is getting to be a dirty word,” Mark Grant, Illinois state director of the National Federation of Independent Business, told Illinois News Network.

In her frustration with lawmakers, the state’s comptroller Suzana Mendoza stated…

“I don’t know what part of ‘We are in massive crisis mode’ the General Assembly and the governor don’t understand. This is not a false alarm.”

States are not like Federal governments who can print money out of thin air. States are more like real businesses in that they must balance their budgets as there is only so much money and credit available.

Illinois is the canary in the coal mine. It is an early warning that governments have made outlandish promises to workers in the form of unsustainable pensions funds, and these obligations can never be met.

Puerto Rico had a similar scenario a few months ago, basically they were bankrupt. Illinois is the second alarm in the US, and there will be many more to follow.

Politicians and government officials all over the globe have made promises that can never be met. The winners are those who get to collect on those promises right away, while the losers are those who are stuck with the bills long after the politicians have retired on their pensions.

For Illinois, the problems just magnify. By mismanaging their budgets for so long, investors are now fleeing Illinois bonds. This has caused a sharp spike in bond spreads on Illinois general obligation bonds, making it costlier for the already cash-strapped state to borrow.