Mid-week market update: After the market reaches its upper Bollinger Band, it isn’t unusual at all for it to consolidate sideways and drift for a few days before making the next move. As the chart below shows, this has happened four other times (grey shaded boxes) in the last six months. The latest episode is the fifth.
The market rose in two of the four episodes and fell in the other two, so there are no apparent clues to future short-term market direction. That said, I have heard concerns about the VIX Index declining below the 12 level, which is historically low. But the VIX did not fall below its lower Bollinger Band, which would be an overbought signal for the market.
The most important difference between now and past instances is the pending earnings report from AI bellwether NVIDIA. As a reminder, the last time NVIDIA reported earnings, not only did the stock pop, the upside gap took the S&P 500 with it and the market didn’t look back for weeks.
A sideways consolidation
Not only is the S&P 500 trading sideways, factor returns are also exhibiting a consolidation pattern. While breadth has been positive during this latest advance to all-time highs in the S&P 500 and other major indices, breadth hasn’t broadened out. Neither large-caps nor small-caps have been able to gain a decisive upper hand in leadership.
The sideways drift can also be seen in style returns. U.S. value and growth have traded leadership since February, and international value and growth have trade sideways for the last month.
So where does that leave us? Waiting for a catalyst like NVIDIA.
Bullish anticipation
Going into the earnings report, bullish anticipation is building. The Semiconductor Index rose above absolute and relative resistance. The upside breakout is impressive in the context of its violating of a rising trend line in early April and subsequent sideways consolidation and correction.
As it turns out, NVIDIA’s earnings beat Street expectations. As I write this, the stock is up about 2% in after hours trading. As the option market was pricing in a 6% move in either direction, this represents vastly diminished volatility. compared to expectations.
For what it’s worth, investors will see the minutes of the FOMC meeting tomorrow (Thursday). Jeffrey Hirsch at Trader’s Almanac observed that the Thursday is the most bullish day before the Memorial Day long weekend.
Both my inner investor and inner trader are bullishly positioned. The usual disclaimers apply to my trading positions.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXL
Who me worried?
There seems to be a disconnect between the economic news these days and the stock market. Witness retail sales, home sales, consumer confidence etc. are all coming below expectations. As we have been told many times there is a lag between an inverted yield curve and a recession. Therefore, however small the probability it cannot be ruled out.
On a technical basis I have a different take unfortunately than Cam. Even after Nvidia’s earning SOXL has not made a new high. The Transportation Index has broken down, the number of stocks in the SPX has dropped from 85 at the previous high to 65. Add to that the recent strength in the dollar. There have been many occasions in the past where an index makes a new high above the previous high i.e. a double top, and breaks down.
Put me down as cautious but not ready to short the market. However, if I did, the Dow and the Russell would be my choice.
Agree. The lag effect worries me no end. However we don’t know if this is a simple a slow down or a harbinger of recession.
Number of stocks above their 50 Day moving average has dropped from 85 to 65.
I apologize. I mis-read the calendar and the FOMC minutes were released today.
The hawkish comments were no surprise as there is a blocking minority to rate cuts. Powell needs no dissents to cut rates this close to an election and he won’t get it unless we see sudden weakness in the employment market.