The US stock market broke a five-day losing streak that capped off a week of wild swings. The first two weeks of 2015 have seen the S&P futures go from 10-20 handle ranges to 30-50 handle ranges. The big uptick in volatility that started at the end of December seems to have no end in sight. This week the ECB is meeting in the aftermath of the Charlie Hebdo terrorist shootings, which saw European and world leaders marching in solidarity in Paris. Oil prices continue to provide drama, along with the disappointing earnings of several leading companies in the fourth quarter. Along with all this news, the market continues to try to price in its uncertainty over the Federal Reserve and when it will start raising short term rates.
While many traders may not want to talk about it, the one thing that can and will trump the Fed zero borrowing cost programs and the stock rally of nearly 40% over the last two years and over 200% since March 2009 would be a terrorist attack on the US homeland. You don’t have to be a market timer, analyst or a trader to know that another 9/11 would change everything. Last year alone the S&P made 53 new highs while the Dow Jones Industrial Average made 38.
How long can the bull run?
After a five-year rally some investors are starting to get nervous. This earnings season and last year’s Alibaba IPO got many analysts questioning stock valuations and asking what would justify even higher valuations. Clearly things have become less certain, and that uncertainty doesn’t have a single cause; it’s a list of many. According to Bank of America, stock funds worldwide posted $2.7 billion in outflows in the week ending Wednesday, which was the second week of outflows. As we’ve said previously, when things get uncertain enough, some people will simply stay on the sidelines.
Tom Aspray says, “Three or more years of consecutive double-digit gains in the S&P 500 are quite rare. Since 1975, there has been only one example. From 1995 through 1998, the S&P 500 had gains of 34.1%, 20.2%, 31%, and 26.7%. There were corrections during these years with the most notable being the 22% drop in 1998 before the S&P rallied 33.7% from the October lows to finish the year strong.
Given what I see as the continued improvement in the economy in 2014, I think double-digit gains are again likely in 2014 but the evidence is not nearly as strong as it was last year. I do not expect a smooth ride like 2013 as I think we will see more sharp corrections in 2014.”
DOW JONES INDUSTRIAL AVERAGE
The Dow is off 3.3% from its December highs. On Friday the Dow Jones Industrial Average (^DJI:DJI) gained 190.86 points, or 1.10%, to 17511.57 on Friday. On the year, the Dow is down 1.8%. With an average bull market lasting 5 years the current bull market is now going into its sixth year and has gained 170% since its 2009 low without any corrections approaching the size of October 22, 2008, when the index lost 514.45 points.
S&P 500 INDEX
On Friday the S&P 500 (^GSPC:SNP) added 26.75 points, or 1.34%, to 2019.42. While the S&P gained nearly 30% in 2013 and up 10% in 2014 the S&P is down 1.9% in 2015 and has fallen 10 out of the last 13 sessions. According to Bloomberg data, the S&P posted its 12th consecutive single-day swing of 1 percent or more on Jan. 16, the longest burst of intraday volatility since October. On Jan. 13 the S&P rallied 1.4% before reversing and ending lower on the day. The reversal was the fourth of that size in 3 years.
NASDAQ COMPOSITE INDEX
On March 10, 2000, the NASDAQ made its all-time high at 5132.52, that was 14 years ago and signaled the end of the dot-com boom. Last Friday the Nasdaq Composite Index (NQH15:CME) gained 63.56 points, or 1.39%, to 4634.38, only 498 points off its old high. While the NASDAQ gained 20% in 2014, the inflation-adjusted “real” price, based on the Consumer Price Index (excluding dividends), is still down over 30%. From its 5132.52 peak on March 10, 2000, the NASDAQ Composite Index relentlessly lost -78% of its value until hitting bottom on Oct. 9, 2002, at 1114.11.
CBOE VIX above 2014 and 10-year averages
The CBOE Volatility Index (^VIX), which measures expectations for swings in the S&P 500, declined 6.4% to 20.95 Friday. Still, that left the VIX above its 10-year average of around 20, and well above the index’s 2014 average of 14.2. Most technicians say that the VIX above 20 is a near-term sign of elevated risk and volatility. A move above 30 in the VIZ tends signals a stock market correction and extreme volatility and crash like conditions like that of 2001-2002 or 2008-2009. Over the years the VIX has become much more important in helping traders decide when the S&P is about to move sharply and based on the current price action of the S&P do not think the uptick in volatility will be over anytime soon.
In Asia 8 of 11 markets quoted closed higher and in Europe 11 out of 12 markets are trading modestly higher this morning. This holiday-shortened week’s economic calendar includes only 11 economic reports, one Federal Reserve governor speaking and 10 T-bill or T-bond auctions or announcements. Today’s economic calendar includes the Housing Market Index, 4-Week Bill Announcement, 3-Month and 6-Month Bill Auctions, and Fed Gov. Jerome Powell and UK Financial Conduct Authority Chief Martin Wheatley discussing financial market conduct and structure in Washington. Earnings are due from Morgan Stanley (NYSE: MS), Delta Air Lines (NYSE: DAL), Johnson & Johnson (NYSE: JNJ), Halliburton (NYSE: HAL), and IBM (NYSE: IBM).
S&P futures down 5 of the last 6
Our view: The S&P broke a five-day losing streak last Friday and is up 11 handles this morning at 6:30 am. While there seems to be a shift in the way people see the S&P, it is very oversold. Additionally, Turnaround Tuesday has not been kind to the S&P: down 5 out of the last 7. Our view is that it will take more than one day to squeeze the shorts out. We lean to selling the early rally and buying weakness today.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 8 of 11 markets closed higher: Shanghai Comp. +1.82%, Hang Seng +0.90%, Nikkei +2.07%
- Europe 11 of 12 markets are trading higher : DAX +0.25%, FTSE +0.77%, MICEX +0.46%, GD.AT -0.11%
- Fair value: S&P -6.51, NASDAQ -7.25, DOW -72.59
- Total volume: 2.0mil ESH and 7.8k SPH traded
- Economic schedule: Housing Market Index, Jerome Powell speaks, 4-Week Bill Announcement, 3-Month and 6-Month Bill Auction and earnings from Morgan Stanley (NYSE: MS), Delta Air Lines, Inc. (NYSE: DAL), Johnson & Johnson (NYSE: JNJ), Halliburton Company (NYSE: HAL), and International Business Machines Corporation (NYSE: IBM)
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