"Last week, I reminded you that that one noteworthy historical pattern of the SPX is that it tends to respect half-century mark levels, such as 2,250... For example, after an early December move above 2,250, the SPX did not stray too far above this level, trading sideways in the final three weeks of the month and retesting 2,250 a few times into mid-January."
-- Monday Morning Outlook, February 27, 2017
With a Capitol Hill
healthcare reform squabble stealing headlines last week, and a terrorist attack in London giving investors another risk to ponder, the stock market pulled back. The popular explanation for last week's sell-off was growing skepticism about the House of Representatives' ability to
repeal and replace Obamacare, with the implications being that a failure on this front would make it harder for Congress to tackle tax reform and infrastructure spending.
Surprise, surprise; the S&P 500 Index (SPX - 2,343.98) declined back below its pre-Federal Open Market Committee (FOMC) March 14 close of 2,365 to the vicinity of the half-century 2,350 area. This price action mirrored that of mid-to-late December, when the SPX was roughly 20 points above the 2,250 level pre-FOMC and checked back to 2,250 by late December.
I have discussed on multiple occasions how SPX half-century marks have tended to act as key pivot points or "magnetic" levels historically, with the 2,350 half-century mark being no different. If the SPX price action continues to echo what occurred around 2,250, it is likely that sideways movement grips the market over the next few weeks -- even as we get set to enter the historically strong month of April (per the table immediately below).
As you can see on the accompanying daily SPX chart, last week's action pushed the index to its 40-day moving average -- which, coincidentally, is the vicinity of the 2,350 half-century mark. Since July, this trendline has acted as both support and resistance, with crosses above and below the moving average acting as reliable bull and bear signals, respectively. So as we head into this week, the SPX is sitting around short-term support, roughly 12.5% above its November 2016 pre-election low.
For what it's worth, the SPX closing high earlier this month -- just below the 2,400 century mark -- was 20% above the 52-week closing low at 2,000. I point this out because the 2,293 level is a round 10% above the pre-election closing low of 2,085. This might suggest that another round level -- 2,300 -- is a potential floor in the days and weeks ahead if the market continues its current March trajectory, which is lower.
In fact, after four consecutive months of advances, if the SPX closes below 2,363 on Friday, it will be the first losing month since October. The 2,363 level is just 1 point below strategists' average year-end forecast of 2,364, making this an important level to watch in the coming week.
"I also think bonds, via the iShares 20+ Year Treasury Bond ETF (TLT), offer decent reward vs. risk over the next month. TLT rallied in the month after the Fed last raised rates in December, and with CoT large speculators showing signs of unwinding a multi-year record short position on the 10-year Treasury note, this could be an attractive asset in the weeks ahead. But if TLT breaks $116, all bets are off."
-- Monday Morning Outlook, March 20, 2017
Small-cap stocks, as measured by the Russell 2000 Index (RUT - 1,354.64), are struggling relative to their large-cap counterparts in 2017. In fact, the RUT is trading slightly below its 2016 close of 1,357.13. But it too comes into this week at potential support from its 100-day moving average, which is just a couple of points below the 1,350 half-century mark and this year's January closing low of 1,345.75.
It's interesting that as the RUT finds itself in the red for 2017, the iShares 20+ Year Treasury Bond ETF (TLT - 120.88) moved from "red" to "green" year-to-date, as its price action after the Fed's mid-February rate hike continues to mirror the bullish price action that occurred in the month after the last interest rate increase in mid-December.
Bonds, via the TLT, remain attractive from a short-term perspective -- and are less risky than small-cap equity names, which have struggled since the Fed began raising rates in December. However, you should move your stop-loss on the TLT from the $116 level to $118.80, which is just below its 2016 close.
With the RUT at a year-to-date loss, short interest on RUT components is turning higher from two-year lows. The risk in investing in the small-cap space is that shorting activity is more apt to increase on RUT components in the weeks ahead now that the index is trading in negative territory this year. Continued shorting activity could create a headwind for this group.
With equity benchmarks trading around key short-term support levels, volatility measures are on my radar, especially after the expiration of nearly 3.7 million CBOE Volatility Index (VIX - 12.96) call contracts last week.
In fact, as I pointed out on Twitter, the volatility benchmark was trading at 11.25 just ahead of VIX expiration -- half the pre-election closing high of 22.50, where it has generally found a floor since December. And since December, it has not been a good time to be long stocks in the immediate days after a VIX touch of 11.25, per the study displayed in the table below.
There has not been a significant volatility pop this year -- but as I said last month, it is usually in the aftermath of
VIX options expiration that we are most vulnerable to a VIX pop. This isn't a huge surprise, as volatility is more apt to surge when negative headlines emerge and market participants are scrambling to hedge portfolios by purchasing equity exchange-traded fund (ETF) puts or VIX calls to replace recently expired portfolio insurance options.
On Friday, in fact, it appeared we were moving closer to a pop in volatility as headlines crossed about the ill-fated healthcare reform bill. But the VIX peaked at 14.16, the site of its December post-election highs between 14.04 and 14.12.
The good news for bulls is that in the two previous instances the VIX printed 14 since the election, it was a buying opportunity that lasted about a week before sideways action beset equities. From this perspective, you want to be a buyer for the next week.
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