The temperature is falling, we’ve rolled back our clocks one hour, and everywhere we look, we’re seeing signs that the stock market bears are getting ready to hibernate for the winter.
This is exciting news for anyone with a 401k. If the bears start hibernating, there’s nothing to keep the bulls from pushing the S&P 500 up to even more all-time highs. So, what signs are we seeing that the bears are taking a break?
Stock traders are rotating into more aggressive sectors, small-cap stocks are breaking through resistance, the CBOE Volatility Index (VIX) is falling and longer-term bond yields are breaking higher.
Historically, when traders are optimistic about the future of the stock market, they push their money into stocks from more aggressive sectors, like the financial, consumer discretionary, technology, basic materials and industrial sectors.
So, what’s happening now?
Let’s look at a comparison chart of the ten S&P 500 sectors — and the S&P 500 itself — as tracked by State Street Global Advisors through the organization’s Select Sector SPDR funds.
Since the beginning of October, you will see the following results in the chart below:
- Financial Select Sector SPDR Fund (NYSEARCA:XLF): 7.6%
- Industrial Select Sector SPDR Fund (NYSEARCA:XLI): 7.3%
- Technology Select Sector SPDR Fund (NYSEARCA:XLK): 6.6%
- Energy Select Sector SPDR Fund (NYSEARCA:XLE): 6%
- Health Care Select Sector SPDR Fund (NYSEARCA:XLV): 5.2%
- Materials Select Sector SPDR Fund (NYSEARCA:XLB): 4.8%
- SPDR S&P 500 ETF (NYSEARCA:SPY): 4.7%
- Consumer Discretionary Select Sector SPDR Fund (NYSEARCA:XLY): 1.8%
- Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP): -0.8%
- Real Estate Select Sector SPDR Fund (NYSEARCA:XLRE): -2.3%
- Utilities Select Sector SPDR Fund (NYSEARCA:XLU): -3.1%
Seeing the financial, industrial and technology sectors leading the way higher for the past month tells us traders are gaining confidence. They are willing to take on more risk in the hopes of achieving greater profits.
We’re also seeing confirmation of that confidence as traders take on even more risk by buying small-cap stocks.
Small-cap companies are riskier because they aren’t as large and stable as most blue-chip companies. However, because they aren’t as large, it’s easier for them to experience double-digit growth.
As you can see in the daily chart of the Russell 2000 Index above, the small-cap stock index has broken up through a key down-trending resistance level.
The Russell 2000 still has a long way to go to start forming new all-time highs like the S&P 500 has, but this bullish move is a great first step.
The CBOE Volatility Index (VIX) is known as the “Fear Index” because it is such a helpful gauge to measure how worried traders are that the S&P 500 might suddenly drop.
When the VIX starts moving higher, it is telling you that traders are getting nervous. When the VIX starts moving lower, it is telling you that traders are gaining confidence.
Looking at the daily chart of the VIX above, you can see that the index has dropped down to support at 12.
Seeing the VIX this low tells us that traders aren’t worried about the S&P 500 dropping in the near term.
10-Year Treasury Yield
The 10-year Treasury yield, as represented by the CBOE 10-Year Treasury Note Yield Index (TNX), has been dropping lower all year. That’s because traders have been buying Treasurys as a “safe-haven” investment to try and diversify and stabilize their portfolios.
When demand for Treasurys goes up, it pushes the price of Treasurys higher. And when the price of Treasurys goes higher, the yield on Treasurys drops.
Price and yield have an inverse correlation — meaning they move in opposite directions. When one goes up, the other goes down. If yields started to increase, it would mean investors didn’t feel the need to keep buying safe-haven assets, and this week, the TNX is making a bullish move.
As you can see above, the TNX has been stuck below a down-trending resistance level since November 2018. Interestingly, after forming two higher lows during the past two months, the TNX has finally broken up through its resistance.
Just as we mentioned earlier, this tells us that demand for Treasurys as a safe-haven investment is falling, which is making Treasury prices fall, which is making Treasury yields rise.
In other words, traders are gaining so much confidence in stocks that they feel okay about easing up on their Treasury investments.
The Bottom Line
Everywhere we look, we’re seeing confirmation that the stock market bears are starting to hibernate, and the stock market bulls are taking over. We expect this trend to continue through the end of the year.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it. John & Wade do not own the aforementioned securities.