Mid-week market update: This relief rally from last week’s lows has been stunning. The stock market shrugged off a hot employment report, a Middle East war that could set off an oil price surge, and a hot PPI print this morning to rise 3.5% off last week’s lows. But it may be time for a pause in the advance. The 5-day RSI is now in overbought territory, and the VIX Index has recycled from above its Bollinger Band to the 20 dma, or the middle of the band.
Still intermediate bullish
While I expect a few days of consolidation, the intermediate-term trend is still up. One supportive data point is the muted response of gasoline prices to the war in the Middle East. Even as oil prices spiked, the gasoline to oil price spread, which is reflective of refining margins, fell. This development should mitigate any inflationary pressures from any oil shock.
The 10-year Treasury yield, which was the source of much anxiety, fell after the onset of the war. Combined with increasingly dovish comments from Fed officials, these developments should be bullish for risk assets.
Credit market risk appetite has also been holding up well. High yield bond relative performance is exhibiting a positive divergence to the S&P 500 – another bullish development.
Subscribers received an alert this morning that my inner trader had taken profits in his long S&P 500 position. As the market is showing signs of a near-term stall, the prudent course of action is to step to the sidelines ahead of tomorrow’s all-important CPI report.
The stock market is likely to consolidate or pull back in the next few days, but the intermediate-term trend is still up.