Near-Term Bullish Complacency Is High (To Say the Least)

The U.S. stock market last week once again did what it tends to do best in late stages of cyclical bull markets — namely squeeze out another record high in price and near record low in volatility. The grind higher continues, but bullish complacency among institutional investors I spoke with last week remains in my eye unsustainably high — at least in the very near term. To be clear, I still foresee another rally for stocks into year-end but a little reset moment would go a long way in setting up trades with better reward to risk ratios.

Near-term Bullish Complacency Is High (To Say the Least)

Indeed, if there is one thing I have learned in my thus far 20-year career as a trader and investor it is that fighting strong tends is a losing strategy over time. That however does not mean once must load up on fresh long positions at all-time highs and on the back of the VIX stringing together it longest sub-10 period in a very long time (possibly ever).

The current macro background of the stock market in my eye very much depends on the path of U.S. interest rates into year end, for now.

To wit, last Wednesday Oct. 11, I had the great pleasure of attending an exclusive presentation by my friends at Bloomberg where the featured guest speaker was none other than Charles Evans, president of the Chicago Federal Reserve Bank.

Evans really reiterated the Fed’s data dependency, but in my eye he gave a further hawkish undertone, which could result in interest rates rising further into year-end. This would also nicely play into my fourth-quarter themes that I outlined in this column last week.

Looking at the corporate calendar a massive avalanche of corporate earnings are on tap the next two weeks, which for the more active crowd stands a high likelihood of bringing about more trading opportunities.

The SPY Vs. Implied Volatility


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Having said all that, my hungry alligator chart has now turned into a starving alligator, where the S&P 500’s SPDR S&P 500 ETF Trust (NYSEARCA:SPY) in blue continues to diverge from its implied volatility in red. If you listen closely you can literally hear this rubber band stretch to extremes. In short, a mean-reversion move (lower stock prices and higher implied volatility) is just about a sure bet yet the timing thereof is tricky.


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10-year U.S. Treasury Note bond yields last week closed near 2.28% and took a bit of a breather. The multimonth chart, however, does have many bullish ‘things’ going for itself, which is to say that a push higher toward 2.60 or higher into year-end looks likely at this juncture.

If another push higher in rates does indeed unfold, then this would favor the financial sector and banking stocks.


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Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

Another sector I remain bullish on in the fourth quarter is energy as represented by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE). The XLE ETF is literally coiling up below its red 200-day simple moving average. A daily close above the $69 area on this ETF could indeed signal a next leg higher in energy stocks and thus possibly unveil another money making opportunity into year-end.

Conclusion

In summary, near-term risk for the stock market from where I sit remains notably elevated. The VIX managed to close last week below 10, marking the 25th straight day with a sub-10 print in the VIX. Nutty as that is, it can continue for another while..until one morning it’s all over.

As such, I prefer to play defense right here right now and then look to buy into any possible dip for a year-end melt-up. Earnings season kicks into major gear this week, which could (possibly) be the precursor to a spike in volatility for equity markets as comparisons for company top and bottom lines are getting more difficult on a year over year basis.

More importantly, more single-name stock trading opportunities will arise from earnings season. Patience remains key.

Check out Serge Berger’s Trade of the Day for Oct. 16.

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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