Simply amazing. For the ninth week in the last eleven – and the second in a row – the SPX has tacked on gains. Last week’s advance was an 18.28 point gain, or 1.3%. The index also reached new multi-year highs. Since August’s low, we’ve gained a stunning 23.0%.
Feel like you’re missing out? Technically you are, but there’s little comfort in knowing the market truly is pressing its luck. And, there are a couple of clues that the S&P 500 is finally running out of steam. Options trading investors should check the charts here.
The first and biggest one is that the upper Bollinger Band is now pointing lower. There’s still a chance that some persistent buying here could force the upper band upward again, but that’s the low-odds outcome from this scenario.
Second and more subtle is how the CBOE Volatility Index (VIX) is NOT moving lower while the market moves higher. Rather, the VIX is hitting a floor at 15.60, as it has since December. It’s a modest suggestion that there’s not as much backing behind this rally as there seems to overtly be.
(Of course, the VIX could fall below the 15.60 level at anytime, while the SPX could push through the upper Bollinger Band rather than be trapped by it. Such a dual move has the potential to jump start yet-another leg of rally. Or, it has the potential to be a blow-off top. Welcome to trading, and trying to guess what’s going on in the market’s collective head.)
The solution to the dilemma is simply to wait for a trading scenario with a little more certainty. As ripe as we are for a pullback, we can – and should – wait for the S&P 500 to slide under the critical 20-day moving average line at 1300 before assuming the worst. Otherwise, the bulls are still technically in charge.
SPX & VIX Daily Chart w/ Bollinger Bands & Moving Averages
Just for good measure, a quick look at the NASDAQ’s chart (though it’s pretty much telling the same story). While the composite also made a nice gain last week, as it has for the last four months, it too has run into an upper Bollinger Band that is now sloped lower for the first time in a very long time. If comparable past scenarios like this are any clue, the market is struggling here much more than it seems to be on the surface.
As was also the case with the S&P 500, however, being ripe for a pullback doesn’t inherently mean one is coming. Let’s use the NASDAQ’s 20-day moving average line at 2747.6 as a make/break level here as well (even though that’s not been a bulletproof ‘tell’ recently).
Most sectors posted nice gains last week, but a few of them really picked themselves up off the mat. Take transportation for instance, which had been lagging, but soared last week. The same goes for telecom. Industrial stocks had been doing just fine on their own already (in second place since late November), but really hit the gas last week.
At the bottom of the totem pole you’ll find utilities – again – and healthcare wasn’t exactly hot either. One of the other surprising laggards last week, however, was energy…. the leader of the 2011 rally so far.
While any pullback is likely to zap all sectors to various degrees, we’re still seeing enough of a shake-up here to really start planning on reworking our sector biases; you should too. While we’re not advocating blindly plowing into the six laggards and pouring out of the five leaders, it is time to start respecting the market’s sector dynamics.