Last week the jobs report was a huge disappointment… for some. But many market participants viewed the terrible figure with a big silver lining: no changes likely from the Fed. This implies lower rates will be sticking around for a while. And the stock markets responded with both the DJIA and S&P 500 hitting all-time highs.
The NASDAQ didn’t go along for the ride. In fact, tech has been dancing to its own drum beat for a while it seems. Then again, it’s crept up to become the largest sector in the SPX and has drawn the eyes of political regulators lately. So it has some unique challenges.
When looking under the hood of this market, there are things to be nervous about. But there are things that are still positive. For example, the VIX has dropped down nearly 50% from its March 2021 highs.
For some, this drop in the VIX could be a contrarian indicator (things look too good, so time for some mean-reversion). But the VIX around 17 is still significantly higher than the figures down in the 11’s that printed back in 2019… or down in the 9’s in 2017. So there is certainly history showing it can drop significantly from here.
A look at trading volatility recently suggests markets are a bit over-bought. But again, with the VIX declining, a mean-reversion would be about a 1.5% pull-back for the SPX. That’s well within the typical intra-week price movement for the index.
The largest risks to this market seem to be political at this point. Both the Fed and Washington have been spiking the proverbial punch bowl for so long any change is position is likely to be met with a pull-back.
The current path of the SPX suggests a forward multiple of 30 for the index. This is no doubt supported by the low cost of capital floating around out there.
If the cost of capital were to change, this forward multiple could be in danger. We’ve already seen signs that the technology sector responds poorly in a rising 10-year treasury yield environment. If treasury rates were to rise, this could create a headwind for tech that would likely impacts the indexes (because, again, tech is now the largest sector weighting for both the NASDAQ and S&P 500).
Bear in mind, this is most likely a short-term phenomenon. Tech, as a sector, has grown to be so large in the US economy for good reason – it touches nearly everything in our lives now. And as the US continues to evolve into a more specialized service economy with roboticized manufacturing, there seems to be little to slow the growth of the sector (in fact, if I had to guess, the sector will be subdivided in the future because of its growth).
Looking at the week, it appears the market will continue to climb the wall of worry. All three major indexes have buy signals in the BigFoot database, all three macros are long (note, the economic indicator is still goofy because of the jobs figures), and the database itself has crept up to over 78% long. While there is growing potential for the VIX to spike and mean reversion to occur, it still looks to be further out (and for now, it looks like weeks, not months). Absent a specific trigger event, or some kind of significant change in fiscal or monetary policy, the path looks short-term positive, with SPX support at 4200/4191/4165, and resistance at 4240/4258/4280.
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