Mid-week market update: The S&P 500 is pulling back to test its rising trend line and the VVIX, or the volatility of the VIX Index, spikes above the key 100 level, which indicates rising market anxiety. However, an analysis of market internals reveal a remarkable level of bullish resilience in the face of recent unsettling headlines over Jerome Powell, Greenland, Iran, and Venezuela.
Breadth Support
Much of the weakness has been concentrated in the megacaps. The equal-weighted S&P 500, the small-cap Russell 2000, and non-U.S. stocks, as measured by the MSCI All-Country World Index ex-U.S., are are in uptrends. Blink and you would have missed the S&P 500 pullback as all these indices are green today.
In particular, the Russell 2000 has outperformed the S&P 500 this year, which is consistent with turn-of-year seasonal patterns. If history is any guide, stock prices are likely to consolidate sideways for about a week before resuming their upward grind, with small-caps leading the way for the remainder of Jnauary.
A Recovery on the Horizon
Watch for a Trump pivot to a more stock market friendly posture in the future. Risk indicators like the VIX and MOVE are rising into the neutral zone. Further disruptive announcements could easily push risk indicators into the TACO (Trump Always Chickens Out) Zone.
Despite the recent risk-off episode, I am encouraged by the recovery in Bitcoin, which functions as a quick-and-dirty real-time indicator of liquidity. Rising liquidity should be bullish for the price of risk assets.
My base case continues to call for higher stock prices by late January and early February after a brief period of choppiness and consolidation.