U.S. large-cap stocks notched new record highs on Monday in a continuation of the power and persistent rebound out of the Oct. 15 panic low. It was a quiet session, with futures market activity in e-minis at its lowest level since Aug. 27. Amid a lack of notable headlines, the bulls carried on with business as usual despite indications of tensions heating up in Ukraine (reports of Russian tanks crossing the border were largely ignored).
In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 gained 0.3%, the Nasdaq gained 0.4%, and the Russell 2000 gained 0.5% after testing into the red earlier in the session.
Biotechnology shares were the standout, with the iShares Nasdaq Biotechnology ETF (IBB) adding 1.7%. Elsewhere, cyclicals lagged defensive issues with technology struggling early on and energy and consumer discretionary unable to bounce back, finishing with losses of 0.8% and 0.1% respectively.
News that President Obama said the Federal Communications Commission should regulate the Internet like a utility slammed telecom stocks like Charter Communications (CHTR), Comcast (CMCSA), and Time Warner Cable (TWC) for losses of 4% to 6.2%.
Really, the biggest story of the day was a slight unwinding of the risk-off/defensive moves seen on Friday with gold, crude oil and Treasury bonds getting hit after popping higher ahead of the weekend. Volatility was also compressed, with the CBOE Volatility Index, or the VIX, dropping to levels not seen since the middle of September.
Lack of market breadth during this rebound remains a problem. I’ve touched on it before. And it’s worth touching on again.
Jason Goepfert at SentimenTrader notes that we’ve yet to see a 90% upside day since the Oct. 15 low. That is, a day featuring a market surge in which more than 90% of the market volume is in stocks that are rising. We had a couple of 84% days (on Oct. 21 and again on Oct. 28). But no 90% days.
Since 1997, when the market has moved more than 9% from a low and failed to put in a 90%-plus volume day, it was normally bad news in the medium term. Prior examples were clustered near the top and during the deflating of the dot-com bubble. Typically, 90%-plus moves have been associated with the start of more robust, long lasting uptrends including the 2009, 2010 and 2011 market rebounds.
Since so much has been dependent on cheap money stimulus, remember:
- The Fed’s QE3 program is over and rate hikes are set to start in six months or so.
- The European Central Bank has been bluffing markets with the promise of a $1 trillion plus quantitative easing program. Political pushback from the Germans means this probably isn’t happening. Once that becomes clear, market confidence could dissolve quickly.
- Japan probably fired its last shot a week ago Friday given the narrow 5-4 decision by the Bank of Japan to expand its asset purchase program and the long-awaited announcement of the public pension allocation shift. If things turn south now, Japan’s trading partners in Asia will push back against any threat of additional money printing.
And finally, the stage is set for political fireworks in Washington as soon as next week if President Obama announces executive action on immigration just as geopolitical hotspots in Iraq and Ukraine are heating up again.
As a result of all this, I’ve recommended Edge Pro subscribers start building up defensive positions again with put option plays against stocks like Caterpillar (CAT) and Intel (INTC) that look ready to roll over.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.
