ManyWaysToTrade Analysis & Market Outlook – 02/13/2017
Stocks broke out of the prior week’s narrow range last week to register new highs. The S&P successfully broke above 2300 and held that level for the weekly close.
The impetus for the move higher was Trump’s new tax plan to be released “in a few weeks”. More “hope” for the markets to rally on but nonetheless, enough “hope” to spark new all-time highs once again.
Our favorite part of last week though were some proclamations (a few by our own members) that thanks to Trump and his illustrious billionaire cabinet, the S&P will never trade below the 2300 level again. Let’s dig a little deeper to see if they might be right….
Below we provide 2 charts:A 6 month look at the S&P 500 and a 5 year look at the VIX.
The S&P reflects a strong uptrend originating from the early November election bottom. Since that time, 3 months ago, the S&P has risen 11%. For context, that is a 44% annualized. Since January 1st, the S&P is up >3.5%.
Needless to say, this is quite a powerful rally which has brought most sectors along for the ride. The rally is getting a little long in the tooth though. Look at it another way, if you were presented the opportunity to buy stock that had risen 11% in 3 months, annualized to 44% per year, you would likely wait for lower prices to purchase citing the stock being overbought. That is what is happening in the S&P.
Traders are not willing to commit to buying at these nosebleed levels after such a rally. That is why you don’t see any convincing moves higher. Instead, most of the price action occurs in the morning with price merely floating around the rest of the day.
Don’t misunderstand this commentary to be a hatred of the rally or lack of confidence in the economy, etc. Merely a perspective on where markets are and what may happen next. So outside of looking at a 45 degree angle rise on the S&P in a short period of time when nothing has actually changed, only a lot of talk about what might, what else can we look at? The VIX is a great place to start.
The VIX closed below 11 again last week. For reference, the 5 year chart highlights the 11 level on the VIX with the horizontal blue line. Each touch of that level is then circled. What do you notice?
Each time the VIX hits 11 there is an immediate touch of 17.5 and typically above 20 shortly thereafter. Analysis yields that each time the VIX strikes 11, within 30-40 days there is spike to higher, more normal levels, which correspond to an inverse move (a move lower) on the S&P.
The most recent date VIX first sank below 11 was January 25th. Therefore, it is plausible to expect a touch of the 17-20 VIX level sometime around the end of February.
We expect a challenge of S&P 2325 followed by retest of the 2290 level, at minimum, heading into months end.