The amazing race to the top continued on the Nasdaq yesterday, which recorded its sixth consecutive up day. The Russell 2000 also closed higher for the day, and even though the S&P 500 closed in the red, it did so barely, and the charts recorded an inside day.
The wonder that is implied volatility for the S&P 500 components, as measured by the CBOE Volatility Index (VIX), barely moved yesterday. One would think that after five vicious rally days, some people might take the opportunity for some put buying and, thereby, at least somewhat elevate the VIX. But such was not the case yesterday, and “fearless” investors ruled the day once more.
In terms of single stock outperformers, it was again the quarter-end and recent high-beta chasers such as Green Mountain Coffee Roasters (NASDAQ: GMCR), Lululemon (NASDAQ: LULU) and the like that faired the best and have flipped their charts completely vertical in recent days. This steep angle of ascent is not sustainable and must correct at least somewhat.
In terms of sectors, the financials were sensible enough to take a breather yesterday, and recorded a healthy consolidation day. The energy and consumer discretionary sectors, on the other hand, found the energy to power higher for yet another day.
The way I see it is simple: The pace at which stocks fired off the bottom last week is unsustainable. Stocks can now work off the excess froth in two ways — both of which are viable. One is that some profit-taking takes place in the coming days causing a healthy pullback in stocks to the tune of 2-3 percentage points on the major indices. Or two, stocks stay right where they closed yesterday, and for a few sessions wander sideways, in essence working off the overbought condition by way of time rather than price.
I remain of the view that last week’s bullish action in equities should lead us to higher levels over the next few weeks, but a little breather here over the next few days is in order. As we head into the end of summer and early fall, risk should come under pressure again, i.e., lower stock prices.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.
