Once again, the bulls have proved unable to break decisively away from the 18,000 level on the Dow Jones Industrial Average.
They’ve had six months to do something … and they’ve only managed a feeble, sideways consolidation.
Now, it looks like the bears are taking control of the stock market — spurred on by weakness in the bond market as yields rise on higher inflation expectations — pushing the Dow Jones back to the bottom of its two-month range.
Small-cap stocks in the Russell 2000 have been hit harder, trading down to its early March lows.
It looks like pressure will continue to push on the stock market. Here are three reasons why.
A Bond Market Selloff
Click to Enlarge The pressure on bonds can be seen in the way the iShares Barclays 20+ Year Treasury Bond Fund (NYSEARCA:TLT) has sliced below its 200-day moving average for the first time since early 2014. From a low of 1.68% in February, the 10-year Treasury yield has pushed above 2.22%.
While the Federal Reserve hasn’t yet taken action to raise short-term interest rates this year (but is expected to sometime in the second half), the bond market is already moving the long end of the yield curve on increased inflation expectations. An improvement in the global growth outlook is playing a role as well.
While both of these developments are exactly what central bankers have been trying to accomplish, the overstimulated, geriatric bull market in bonds that goes back to the early 1980s now appears to be at risk. And that will result in stock market volatility via all kinds of linkages, such as threatening the flow of debt-financed share buybacks.
Stock Market Breadth Is Rolling Over
Click to Enlarge The chart to the right shows how market breadth — or the percentage of stocks in the S&P 500 that are in uptrends — has once again started to roll over returning to levels not seen since February.
Since last summer, investors have limited their interest to a rather narrow group of stocks. That’s a sign of vulnerability and a lack of value.
Should the breadth contraction continue, stocks will be pulled down and out of the tightening consolidation range they’ve been in since November.
Volatility Is Back
Click to Enlarge And finally, the CBOE Volatility Index (VIX) — known as Wall Street’s “fear gauge” — has popped up and out of the downtrend channel it has been mired in since the beginning of the year.
That’s a sign options traders are starting to pay up for put option protection against a market pullback.
I’ve recommended by Edge subscribers respond by booking profits in their existing positions, including a 9.4% gain in the Market Vectors Oil Services ETF (NYSEARCA:OIH) added on April 6, and look to profit on the rise in the VIX via the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ:TVIX)
Edge Pro subscribers have added a call option position on the iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX) and closed positions including a 117% gain in their May $16 Bank of America Corp (NYSEARCA:BAC) calls.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
