As a former boss of mine at J.P. Morgan used to say, “A little perspective goes a long way.”
In that vein, I’d like to kick off my two-week stint filling in for Sam Collins on the Daily Market Outlook by providing some perspective with today’s charts.
Stocks’ impressive advance off the January/February lows resulted in a surge in bullish sentiment.
While that alone is a decent contrarian indicator, we have also seen a drastic widening in the spread between the S&P 500 (blue line) and the Volatility S&P 500 (VIX) (red line). When the lines get this far apart, it’s usually only a matter of time before a mean-reversion move, although that move can take a while to occur.
Since the summer of 2015, we have seen two big mean-reversion moves where stocks fell hard and the VIX blasted higher. Specifically the two lines “kissed” in August and again in January/February.
Since the market and the economy are in contraction mode rather than expansion mode, I expect a mean-reversion move to take place sooner rather than later. In other words, the volatility that has been larely absent from the market since February may make a comeback.
Turning to the daily chart of the S&P 500, the index is approaching a simple line of resistance from the 2015 highs. More importantly, though, momentum oscillators such as the MACD indicator (shown at the bottom of the chart) are flashing serious overbought readings.
This is not to say stocks can’t move somewhat higher in the near term. But a sustainable breakout as some market pundits have come to call for in recent weeks looks highly unlikely.
For such a breakout to occur, stocks need a multimonth sideways consolidation to rejuvenate. To yours truly, that seems rather unlikely if we look beyond the technicals and consider slumping revenues and earnings and slowing global economic growth.
Now that we have some perspective, let me turn briefly to Monday’s price action.
The trading day was handicapped by three things:
- An options expiration hangover;
- A recovery in oil prices, which fell overnight Sunday following the fruitless Doha meeting of oil producers; and
- The parade of earnings reports that lies ahead this week.
My latest look at market breadth shows stocks making new 52-week highs may have topped in late March. Considering this, the bigger picture we discussed today and the earnings avalanche ahead, now does not look like a good time to chase stocks.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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