With the S&P 500 closing Friday just 2.7% below last summer's all-time high, it is safe to say that the bulls have escaped the bears' grasp. But as I've been saying for some time now, the oil correlation trade remains fairly well entrenched. And since oil too has rallied in impressive fashion this year, it is hard to get overly excited about the potential for what by all rights looks like new bull cycle. Cutting to the chase, I remain concerned about what will happen at the corner of Broad and Wall if oil starts to retrace some of the recent pop.
On that note, it is mildly encouraging that stocks have not followed the price of oil around like a little puppy dog lately. In fact, stocks actually rose during the latter half of last week while oil pulled back. And while I'm not willing to declare the correlation trade dead just yet, this IS a step in the right direction.
S&P 500 - Daily
Before we leave the subject of crude, it is important to note that oil's bounce, which is likely to wind up in the "dead cat" category when all is said and done, appears to be in trouble. At issue is the fact that Saudi Arabia said last week that the only way it would cut production is if Iran agrees to also cut back. And since these two countries aren't exactly best buds and most of the Middle East needs the cash from the sale of their oil, it isn't much of a stretch to think that oil could be resuming its rude move lower.
US Oil Fund (NYSE: USO) - Daily
As I mentioned at the outset, the good news is that stocks have ignored crude's decline - at least for now. And it would appear that the key to the recent gains in the stock market really isn't about oil but rather all the Fedspeak central banker talk.
Has The Fed Become the Focal Point Again?
To be sure, Janet Yellen deserves much of the credit for the S&P 500 closing last week at the highest levels of the year. You see, the Fed Chair surprised markets Tuesday with a decidedly dovish tone in her speech to the Economic Club of New York.
In short, Yellen said that caution in raising rates is "especially warranted" at this time. In response to this and other rather dovish comments - including the words "further stimulus" (and to be honest, I'm still shaking my head on that one) - traders immediately scratched the potential for an April rate hike from the board and wondered aloud whether the Fed is still bent on returning rates to more normal levels any time soon. And some are even arguing that the dollar has become a focal point as a falling dollar cures all kinds of global ills.
With the Yellen Fed appearing amenable to doing whatever it takes to get some inflation percolating - and even appearing willing to overshoot the Fed's target here - investors are reminded that stocks remain the only game in town.
So, once again, it looks like the central bankers have saved the day for the stock market. It happened in 2014 (Bullard). It happened in 2015 (Super Mario). And now it has happened again in 2016 (Yellen).
The trend is now quite clear. Stocks enter a corrective phase for any number of reasons. And then, right about the time things start to look ugly, the central bankers step in and say whatever they need to say in order to keep "asset prices" moving higher. All in the name of pushing inflation to their "target" of 2%.
One of the big questions in my mind is how long can the global central bank intervention game continue? Sure, it is great to see the corrections in the stock market stay shallow. But can we really assume that this game will continue indefinitely? Time will tell, I guess.
Looking At the Bigger Picture
Looking at the stock market from a longer-term perspective, the weekly chart of the S&P 500 shows that stocks have made no progress since the fourth quarter of 2014. In other words, stocks have been moving sideways now for 18 months.
S&P 500 - Weekly
Here's my take on the situation. Stocks have been supported on the downside by the global central bankers. Each and every time the market starts to decline the central banker cavalry rides. This causes traders to remember that the Fed usually gets what they want and a rally quickly ensues. So, the "Fed Put" would appear to be alive and well.
However, the rallies have tended to fail when stocks approach the old highs. Why? In short, because (a) valuations remain high, (b) corporate profits have declined for 5 straight quarters, and (c) the threat of systemic risk from the oil bust.
As such, it looks stocks are trapped in a trading range that is about 15% wide. And until one of the teams can break on through to the other side, investors should probably play the game accordingly.
Today's Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -1.34%
Crude Oil Futures: +$0.11 to $36.90
Gold: -$1.00 at $1222.40
Dollar: higher against the yen, lower vs. euro and pound
US 10-Year Bond Yield: Currently trading at 1.768%
German 10-Year Bund Yield: Currently trading at 0.140%
Stock Indices in U.S. (relative to fair value):
S&P 500: +2.45
Dow Jones Industrial Average: +19
NASDAQ Composite: +6.85
Thought For The Day:
The art of being wise is knowing what to overlook. -William James
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the Oil Crisis
2. The State of Global Central Bank Policy
3. The State of the Stock Market Valuations
4. The State of Global Growth
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend (1 - 3 Weeks): Positive
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend (1 - 6 Months): Moderately Positive
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend (6 - 18 Months): Neutral
(Chart below is S&P 500 daily over past 2 years)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Key Near-Term Support Zone(s) for S&P 500: 2050(ish)
- Key Near-Term Resistance Zone(s): 2080-2135
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator (Short-Term): Positive
- Price Thrust Indicator: Positive
- Volume Thrust Indicator(NASDAQ): Neutral
- Breadth Thrust Indicator (NASDAQ): Moderately Positive
- Short-Term Volume Relationship: Positive
- Technical Health of 100+ Industry Groups: Moderately Positive
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- S&P 500 Overbought/Oversold Conditions:
- Short-Term: Overbought
- Intermediate-Term: Overbought
- Market Sentiment: Our primary sentiment model is Neutral
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.
- Weekly Market Environment Model Reading: Moderately Positive