EDITOR’S NOTE: Sam Collins will return to the Daily Trader’s Alert later this week. Anthony Mirhaydari is providing today’s Market Outlook. Thank you!
U.S. equities continued in their uneasy stasis on Monday — punctuated once again by flurries of excitement out of the technology sector courtesy of a big 2.7% gain in Apple Inc. (NASDAQ:AAPL). While the Dow Jones Industrial Average and the S&P 500 are mired in their tightest trading ranges in decades, the Nasdaq Composite has recently been creeping to new record highs.
Volume was in line with the 30-day average and breadth was negative, with 1.2 decliners for every advancing issue on the NYSE. Energy led the way with a 0.7% gain while materials were the laggards, down 0.9%.
But now, the doldrums have hit the Nasdaq, as outside of Apple, everything is going quiet: All three major indices finished within 0.03% of unchanged on the day. Treasury bonds weakened, the dollar was stronger, gold finished little changed, and oil gained 0.5% in choppy trading.
Despite reporting some underwhelming iPhone sales and persistent headwinds in its operations in China, AAPL stock hit a new record, pushing its market capitalization past $800 billion for the first time. This after some positive comments from the Oracle of Omaha himself (calling the iPhone a “very, very, very valuable product”), reports that production of the upcoming iPhone 8 is on schedule, and lingering excitement over App Store revenue growth.
Looking ahead, Drexel Hamilton’s Brian White slapped a $202 price target on the stock, which would be worth a $1 trillion plus market cap. Much depends on the success of the iPhone 8 after the tepid response to the incremental iPhone 7.
The level of investor complacency being demonstrated is reaching an extreme. With valuations high and the CBOE Volatility Index (VIX) crushed, the ratio of the S&P 500’s price-to-earnings ratio relative to the VIX has hit levels of euphoria not seen since 1994. According to SentimenTrader, their Risk Appetite Index — which is based on an amalgam of indicators including the Citigroup Macro Risk Index and the UBS G10 Carry Risk Index Plus, among others — is nearing 100% and has been unusually high.
Historically, stocks have demonstrated mixed performances going forward in similar circumstances, with “defensive” assets like Treasury bonds, commodities, gold and the VIX doing better.
Another worry has been the very weak market breadth, as fewer and fewer stocks hold the market in its sideways stasis. And the growing list of downright oddities, such as the fact the Dow hasn’t had a three-day winning streak in roughly 50 days, one of the longest streaks in more than 100 years, despite the fact it’s in a bull market.
And finally, a deterioration in the market’s technical measures of health triggered a Hindenburg Omen signal last Thursday as the number of new 52-week lows grows on both the NYSE and Nasdaq exchanges. Although often derided by the optimists as scary-sounding but ultimately useless, the signal has presaged exceedingly poor market returns when both exchanges have triggered.
Since 1986, based on SentimenTrader data, the S&P 500 has gone on to lose an average of 5.1% three months later vs. a 2.5% gain for any random three-month period. The largest drawdown? The three months following the September 23, 1987 Hindenburg Omen, which featured a 22.2% decline.
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.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers. Redeem by clicking the links above.