Mid-week market update: There is a time for an aggressive posture in positioning and there is a time for patience. This is a time for investors to be patient.
In the aftermath of the rally off the October bottom, the S&P 500 is consolidating its gains after breaking out through resistance at 4600 to form a cup and handle breakout. However, it was rejected at all-time high resistance and it’s now working off an overbought condition, as evidenced by the 5-week RSI. The VVIX to VIX ratio, which has led past tactical peaks in stock prices, peaked out just before the January highs, but the lack of a negative divergence in this ratio is constructive inasmuch as this is not a signal of a major top. I interpret current conditions as a consolidation within an uptrend.
An extended condition
Short-term sentiment readings tell the story of an extended position. The Commitment of Traders report show that asset manager and leveraged funds are in a crowded long in equities.
As well, SentimenTrader reported that their “dumb money confidence” indicator surged to one of its highest historical levels in late December but plummeted by 10% in a week. These conditions argue for a short-term bounce, but the market may need to chop further in order for sentiment to normalize.
Indeed, Rob Hanna at Quantifiable Edges revealed that his Quantifiable Edges Capitulative Breadth Indicator (CBI) rose above 10 to 11 on Friday, which is a tactical buy signal. He went on report that CBI fell to 2 on Tuesday, which “essentially ending the short-term bullish indication that triggered on Friday”.
I agree. The VIX Index spiked above its upper Bollinger Band, which is a short-term oversold signal for stock prices, but recycled back to its 20 dma Tuesday, which is a take profits signal if you had bought on the oversold reading.
Focus on leadership
During such choppy periods, it’s useful to focus on the evolution of market leadership. Market breadth had been broadening out, but narrowed again since 2024 began and large cap growth stocks have led again.
The renewal of large cap growth leadership appears to be a counter-trend rally. Investors seeking better returns in a sideways market may be better served by looking for outperformance opportunities in a volatile market. We will have the all-important CPI report tomorrow morning, and Q4 earnings season is just starting.
I can think of two sources of opportunity. One is the financial sector, which is turning up on in relative performance.
The other sector is healthcare. While these stocks are extended in the short run, they are becoming another source of emerging leadership and likely superior relative returns. Consider taking positions on a pullback.
Hi Cam, I like that the Commitment of Traders chart on this post shows traders’ positions relative to their average and 2 std deviations. Where do you source that chart? Thank you.