Mid-week market update: The delayed Jobs Report came in much higher than expectations this morning. The knee-jerk reaction in the pre-opening hours was risk-on, but the market reconsidered its view and pulled back after the open.
Once again, the S&P 500 has failed to break out to the upside, though the equal-weighted S&P 500 achieved an all-time high, and non-U.S. stocks are in a well-defined uptrend. The VVIX, or the volatility of the VIX, remains above the key 100 level, indicating continued market anxiety.
I interpret these conditions as a high degree of vulnerability to a short-term setback.
An Overbought Extreme
Here are some conditions that worry me. Even as the S&P 500 traded in a narrow range as the software stocks got clobbered, retail flows into equities have surged to record levels. While crowded long conditions are not actionable contrarian sell signals, they are nevertheless condition indicators that signal high risk.
The latest Investors Intelligence sentiment readings shows a highly elevated level of bullish sentiment and an extremely depressed level of bearish sentiment.
Bespoke observed that the stock market achieved the never before feat of moving from an overbought condition to an oversold condition and back to overbought – all within the space of a week. This is fertile ground for further short-term volatility.
Even though the CNN Fear & Greed Index is at neutral, the technical components, stock price strength and stock price breadth, are showing signs of extreme greed and greed respectively.
Putting it all together, these readings spell “vulnerable to a correction” within an uptrend. My base case calls for a 5-10% pullback in the context of a bull trend and not a bear market.
Heightened Geopoltical Risk
No one knows what the trigger for a correction. It could be the CPI report due Friday morning.
I believe that the most likely trigger is an attack on Iran. The U.S.-Iran negotiations have gone nowhere. The Iranians remain firm on their right to uranium enrichment and refuse to discuss missile development, which is a key red line for Israel. They have, however, offered to dilute their existing stock of enriched uranium.
U.S. forces are already gathered in the region. They are ready to strike. U.S. British forces are deploye to defend Gulf allies. Israeli Prime Minister Netanyahu met with President Trump today. Israel has threatened unilateral action to bomb Iran’s missile sites. Presumably, the purpose of today’s meeting is to persuade Trump to attack.
The Polymarket odds of a strike on Iran have retreated frin 27% ri 19% since the last update on the weekend in the February time frame, but risen from 50% to 54% in the June time frame. This is occuring against a backdrop of increasing pressure on Tehran for meaningful but unlikely concessions.
Reading between the lines, other developments point to a U.S. domestic electoral component to foreign policy. The Telegraph reported that the U.S. has demanded that Ukraine hold a referendum on the Russian peace offer and elections by May 15, or risk the loss of American security guarantees. Trump wants a win by June. That’s all you need to know.
I don’t know whether an attack will occur, but the forces are deployed in the region and the next new moon will be Tuesday, February 17.
1 thought on “Vulnerable to a Setback”
Any downside bias is fighting the continual floating up of equities due to massive global money printing via deficit spending everywhere other than Switzerland.
U.S.Value, global ex-US and emerging ex-China have underperformed for so long that this last bit of performance still has them cheap versus US big cap Growth. They are not at the ending bow-off phase of a bull market in my opinion. But an American correction could be a small speedbump for them.
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Any downside bias is fighting the continual floating up of equities due to massive global money printing via deficit spending everywhere other than Switzerland.
U.S.Value, global ex-US and emerging ex-China have underperformed for so long that this last bit of performance still has them cheap versus US big cap Growth. They are not at the ending bow-off phase of a bull market in my opinion. But an American correction could be a small speedbump for them.