Well, it’s official. The old adage about selling in May didn’t apply this year. Instead, larger-cap, higher-quality, and value-oriented stocks continued to lead the market higher. The S&P 500 gained +2.1% during the month and confirmed its tentative technical breakout from the prior Friday with steady progress last week. However, it was tepid at best during the holiday-shortened week, and a somewhat concerning ‘double-low’ confirmation — i.e., on extremely low (and decreasing) volume and with a backdrop of persistently low volatility.
The CBOE Market Volatility Index (VIX), a.k.a. fear gauge, closed last week at 11.40, after setting yet another new 52-week low moments earlier. Although some observers are predicting single digits for the VIX, the greater likelihood is a mean reversion in the form of a spike higher. However, the VIX is not a timing tool, so it could stay low for some time before eventually going higher.
Among the ten U.S. business sectors, defensive sector Utilities is still the clear leader year-to-date, up nearly +14% after a strong showing during last two weeks of May. Energy and Healthcare are in a virtual tie for second place YTD. So, the top three are largely defensive sectors, which doesn’t feel particularly bullish in the traditional sense. However, Technology is making an effort to join the leaders, and it was quite strong during May, up over +3.5%. Consumer Services/Discretionary remains the laggard, and Telecommunications also has been weak. Both of these sectors have consistently ranked at the bottom of our fundamentals-based SectorCast rankings.
Going hand-in-hand with the outperformance of defensive sectors is the low (and falling) yield in the 10-year Treasury bond, which indicates that global capital continues to flow into the safety of U.S. Treasuries. The 10-year yield has now dropped below 2.50% and seems destined to fall further, despite prevailing expectations of the inevitability of higher rates among most of the financial community. In fact, I have read some compelling arguments that we are stuck indefinitely in a low interest rate environment, as the Fed cannot raise short-term rates without tanking the economy. And that’s what the flattening yield curve is signaling to investors.
With forward valuations in equities somewhat elevated but not egregiously so, and with low interest rates encouraging corporations to issue debt in order to continue their stock buybacks, and with central banks around the world committed to keeping the liquidity spigots open, there is little reason to expect equities to have a massive selloff anytime soon (although periods of fear-inducing technical consolidations and short-term corrections surely will occur — perhaps soon). On the other hand, there is also little reason to expect a big surge in GDP growth, corporate earnings, and the broader stock indexes, either. So, thoughtful stock-picking (rather than relying on all-boats-lifted-in-a-rising-tide) seems to be in order.
SPY chart review:
The SPDR S&P 500 Trust (SPY) closed Friday at 192.68. The prior Friday, it had barely broken through tough resistance at 190, but last week clearly confirmed the breakout. Or did it? With such ultra-low volume in the holiday-shortened week, bullish conviction to take this market higher is still not clearly proven to me. The Bollinger Bands had become quite pinched, signaling an imminent price move in one direction or the other, and in conjunction with the upside breakout that ultimately occurred, price has been hugging a rising upper Bollinger Band. Now price is quite stretched from its moving averages, and oscillators RSI, MACD, and Slow Stochastic are all either at or approaching extreme overbought levels. With price approaching the upper line of the long-standing bullish rising channel, a pullback seems highly likely to occur soon, first testing resistance-turned-support at 190, and then perhaps the 20-day and 50-day simple moving averages. Below that, support resides at the top of the mid-April gap around 186, the bottom of the gap around 184, and then the lower line of the bullish rising channel (currently around 182.5).
