Post-Christmas Rally Stalling
The stock market has been on a tear since Christmas. In the last 19 trading days, the Dow Jones Industrials (Dow) have gained 2800 points or nearly 13%. Other key indexes have generated equally impressive gains: Nasdaq 100 (+13.5%), Russell 2000 (+15%) and S & P 500 (+12.5%).
The belief that a major bottom formed last December is taking hold. However, very little about the 4 week rally is consistent with a new BULL market. The major indexes ALL REMAIN IN DOWNTRENDS, establishing a pattern of LOWER HIGHS and LOWER LOWS. As long as that’s the case, NO BULL MARKET is possible.
Despite the vigor of the current rally, the charts indicate a possible reversal as shown in the Slide Show below. Some key takeaways from these Charts are the following:
- Each of the major indexes appears to have broken downward, through a NORMALLY BEARISH Ascending Wedge Pattern.
- All of the equity indexes are close to having retraced 50% of their entire BEAR Market losses. This 50% level has historically acted as resistance to any upward move that is “Counter Trend”.
- If the rally should carry further, exceeding the December 1 highs, the BEAR MARKET would no longer be in effect.
Bear Market Rallies have their own traits. A good discussion can be found here: “Characteristics Of Bear Market Rallies”. (https://markonomics101.com/2018/10/17/characteristics-of-bear-market-rallies/).
Two Volatility Sell Signals?
Pictured on the left is the Standard & Poor’s 500 (SPX) versus the Volatility Index (VIX). The VIX is a measure of expected variability of future returns. Higher volatility reflects greater investor uncertainty, or RISK.
Volatility is the most important factor in determining the “cost” of protecting a portfolio from adverse price changes using options. The higher the volatility, the greater the perceived probability of an outsized move. Therefore, the greater the cost to lessen that risk.
In general, market levels are inversely related to volatility. As markets fall, VIX RISES and vice versa.
Since the beginning of the BEAR Market in October, each time the VIX has fallen to about 17, the SPX has made a short term peak. This has been the case 3 separate times. (Points 1, 2 and 3 on the left).
The VIX recently fell to the rally termination zone of 17 and has begun to rise. The likelihood of a resumption of the BEAR Market has increased materially.
The Nasdaq 100, compared to ITS volatility (VXN), is also pictured to the left. The pattern of LOWER HIGHS is clearly evident.
In addition, each time the VXN has fallen to about 22 the NDX has made a short term peak. The VXN has again fallen to that level for a fourth time and appears to have bounced off.
Keep in mind, there is nothing about these levels of volatility that make a decline CERTAIN. However, we CAN say that further sizable upside is FAR LESS LIKELY when investor sentiment, as reflected by Volatility measures, is more complacent.
A reduction in fear was corroborated in the most recent survey by Investors Intelligence, which polls advisers and newsletter writers. As of Tuesday, the majority were BULLS by a solid 45% to 21% margin. (https://www.investorsintelligence.com/x/us_advisors_sentiment.html).
Where’s The Leadership?
Notably ABSENT in the Moonshot which began after Christmas has been market leadership. Despite rallies of nearly 15% in the major equity indexes, NO SECTORS and virtually NO STOCKS are close to or MAKING NEW HIGHS.
In yesterday’s trading, MORE stocks made NEW LOWS on the Nasdaq than NEW HIGHS. On the New York Stock Exchange, a paltry 19 issues made NEW HIGHS. (https://www.barchart.com/).
During much of the nearly decade long Bull Market, leadership was concentrated in the ultra-high capitalization technology monopolies, referred to as the “Four Horseman of the Nasdaq Collapse”. (https://markonomics101.com/2018/08/23/tipping-point-part-2-the-four-horsemen-of-the-nasdaq-collapse/).
The Horsemen, comprised of Apple (AAPL), Amazon (AMZN), Google (GOOGL) and Microsoft (MSFT) remain WELL BELOW their recent highs. From their highs, Microsoft is off 9%, Google 17%, Amazon 20% and Apple 34%. All but MSFT are closer to their lows than highs. The market has no upside leadership. A leaderless market is NOT consistent with any kind of sustainable rally.
Interest Rates Stay Weak
The prevailing market theme for the last year has been expectations for economic growth and Fed tightening. Prospects for strong economic growth both elevated stock prices AND interest rates. Stock prices benefit from higher expecting earnings while bond yields rise to reflect greater borrowing demand.
The charts to the left illustrate the movement of stock prices and interest rates. Lows in stock prices have tended to roughly coincide with Lows in Treasury yields. Highs have also coincided with Highs.
In the last 4 weeks as stocks have been on a tear, Treasury Yields have only marginally advanced. In fact, while equity indexes have retraced roughly 50% of their Bear Market declines, Treasuries are hovering only slightly above their lows. The implication is that the economy remains weak and much of the justification for the rally is simply not there.
If Treasury yields fall to new lows it would certainly increase the likelihood of another sharp move lower in stocks. In any event, the upside is vastly outweighed by the risks. Sitting this out primarily in cash remains the prudent course.
The Government Shutdown “Crisis” remains a Media/Political distraction, rather than an Economic event. See “Surviving The Government Shutdown Crisis”. (https://markonomics101.com/2019/01/13/surviving-the-government-shutdown-crisis/).
However, the shutdown has limited the ability of various agencies to “report” key economic data. But, that’s where WE come in. Markonomics101 is about revealing the INFORMATION that’s relevant to make educated investment decisions. And, without conflicts of interest.
Information is Power. Be Informed, Not Misled!