After its long-awaiting breakout of the 1900 level the other week, the S&P 500 gained another +1.3% last week alone, but this double-low progression as I call it — i.e., on extremely low volume and with persistently low volatility — is worrisome. With the 2000 level now in sight, there still remains a dearth of bullish conviction, and although the technical picture remains quite extended and overbought, there is no sign yet of bearish action to produce the elusive correction that is now so overdue that bears seem to have almost given up on it — for now. In fact, we are seeing short covering and a falling put/call ratio. Some market commentators are saying that market conditions are reminiscent of the mid-1990s. We haven’t seen a real correction in quite some time. So, is this the proverbial new normal?
History tells us that when everyone is bullish the market is near a top. But with volume low and many still underinvested and waiting for an entry point, all these indications of bullish sentiment don’t necessarily mean that everyone has already put all their money to work. So, the market can and likely will go higher. It just doesn’t normally go up in a straight line as it has done. Some backing and filling is normal and healthy — and preferable.
The CBOE Market Volatility Index (VIX), a.k.a. fear gauge, closed last week at 10.73, which set another new 52-week low. Although some observers are predicting single digits for the VIX, the greater likelihood is a mean reversion sometime soon, which could bring it back up to test the 15 threshold once again.
The 10-year yield remains below 2.60% and may yet fall further. This is at least partly because of ECB monetary stimulus to stave off the threat of disinflation in Europe. Moreover, as I mentioned last week, the flattening yield curve here in the U.S. is also a signal that investors believe the Fed cannot raise rates without tanking the economy. However, others are now opining that the despite the zero-interest rate policy, there is not much lending and borrowing for capital expenditures and growth. Rather, they say that the free money is being used for generating low-risk trading profits or for buying back stock to prop up EPS valuations, creating a troubling asset bubble (including stocks).
SPY chart review:
The SPDR S&P 500 Trust (SPY) closed Friday at 195.38. The bulls have been able to continue an unabated upward march with virtually no resistance from the bears. Small and mid caps have joined the party, as well. The only thing missing is volume to demonstrate conviction. However, all of the overbought technical observations I made last week continue to persist — but now doubly so. Price is so stretched from its moving averages that an attempt at mean reversion is virtually a given this week. Also, oscillators RSI, MACD, and Slow Stochastic are all at extreme overbought levels. Notice how Slow Stochastic has been pinned to the ceiling for the past two weeks. Furthermore, price has officially reached the upper line of the long-standing bullish rising channel, which should provide strong resistance, and the upper Bollinger Band has turned into a virtual straight line as it is being carried further higher each day.
