Despite the mild pullback to take away some of Thursday’s strong gains, this week managed to close firmly positive for both the SPX and DJIA for the fourth week of the last five.
Financials, Energy, Industrials, Discretionary gains helped to fuel breadth all week at a time when Technology has been under minor consolidation. Despite what has felt like a very choppy, sideways range in recent days and weeks, stocks are gaining strength internally which is a positive during this seasonally bullish month.
This past week saw commodities lift due to precious metals and energy, while base metals have begun to make some much needed progress.
Sentiment has slowly begun to turn a bit more positive from deeply pessimistic levels from mid-March. However, we’re not near an optimistic level by any means. It’s expected that a breakout above 4200 in the back half of April could get sentiment to bullish levels by end-of-month.
VIX has imploded in recent days as might have been expected with the lack of any unexpected events causing any real turmoil to US equities. While Europe remains quite a bit stronger than US equities, the breadth expansion in US equities which has been ignored by many has still resulted in SPX and QQQ having recaptured 50% of the prior decline from early 2022.
US Dollar breakdown along with Copper breakouts were some of this past week’s most memorable technical developments. Biotech has come to life to help Healthcare, while Gold and Silver remain bullish and have extended gains for most of this past week.
Leading sectors like Semiconductors and Transportation have been noticeable laggards lately. However, this sluggishness has had little to no real impact on broader indices.
Technology’s pullback has been thought to be negative by many market participants. However, as I noted earlier in the week, this has largely revolved around a few Large-Cap Technology names. Equal-weighted Technology, to its credit, managed to turn in gains of over +0.60% over the last five trading days.
Thus, Tech remains in good shape on an intermediate-term basis, and is healthier than what poor performance out of names like $INTC, $AMAT, $MSFT, $QCOM .might have made Technology seem.
When studying indices like Value Line Arithmetic/Geometric index, shown below, we see that when viewing 1700 names on an Equal-weighted basis, more progress needs to be made to have confidence. While Large-Cap Technology has certainly carried US Equity indices over the last three months, the broader market still has some work to do, in order to catch up.
Overall, I feel it’s technically likely that a further rally takes place into late April, but Value Line will need to recoup this prior uptrend that was broken. Despite April’s seasonally bullish bias, May has been seasonally one of the worst months during pre-election years. Keeping a close eye on market breadth and sentiment should prove important in the weeks to come.
Financials powering market this week with XLF outperforming all other 10 S&P SPDR ETF’s
The ability of Financials to stabilize and bounce on the Large-cap side in recent days is thought to be bullish for the broader market and a positive given that $XLF is the third largest sector in the SPX per market capitalization.
$JPM’s earnings helped to drive sharp gains to multi-day highs this week which is certainly a positive for this stock, technically speaking. Outside of JPM, other important Financial names like $C, $BAC, and $WFC all gained more than 5% this past week.
While Regional banks continue to underperform the broader Financials space, it looks like this sub-sector likely can stabilize and start to turn back higher in the weeks to come.
At present, it’s the larger-cap names which are showing performance and this remains the best part of Financials to position in the near-term. Stocks like JPM, C, BAC, WFC have been leaders in recent weeks ,and should be still overweighted within a sector which has lost intermediate-term appeal given its loss of momentum since the Regional banking crisis got underway.
VIX imploding to 18-month lows keeps US Stock indices bullish
As might be expected heading into VIX expiration with a stable stock market, the front month of the VIX futures curve has traded down to new 18-month lows while May is elevated ahead of it becoming the new “front-month” next week.
There remains a steady amount of confusion by many market participants as to how the VIX moves and confusion about why it’s not higher given some recent selling in Technology amidst ongoing negative news. As some market participants are aware, the absence of a market shock typically means that sideways or bullish price action can cause big declines in the VIX. Even the presence of a minor downtrend typically does not impact the VIX as much as many might expect.
Normally the big spikes in implied volatility happen when the news is clearly different than market expectations. For example, the Regional bank crisis last month caught the market off guard, and the VIX spiked sharply.
However, given the broad-based comeback in recent weeks, VIX has slid steadily lower, and now has reached the lowest levels since January 2022 when SPX was near all-time highs.
Technically speaking, a decline to new multi-week/multi-month lows to end the week is typically quite bearish for VIX, even if downward price action Friday happens more frequently than normal in a stable tape, given the weekend being priced out of the options.
Overall, the combination of lack of DeMark exhaustion on daily/weekly charts combined with traditional bearish technical suggests that a further implosion is quite possible between now and late April before any bottoming in the VIX.
Any move back over SPX 4200 would likely result in sharp downward action in implied volatility and might cause the VIX to hit 14-16. This would be thought to be an interesting area and timeframe to consider buying implied volatility heading into the historically bearish month of May (In pre-election years)
Overall, while some brief pop might happen after expiration, I expect VIX to soften further in the next couple weeks before attempting a bottoming process. It looks early for VIX to rally, and owning implied volatility here without any evidence of US Equity indices peaking, looks unattractive for the time being.
Sentiment has gradually improved over the last few weeks
As might be expected following a market rally over the last four of five weeks, sentiment has slowly but surely improved from hugely pessimistic levels which were apparent from mid-to-late March.
While not bullish by any stretch, there looks to be some divergence now between shorter-term sentiment gauges and longer-term sentiment (the latter which remains quite negative)
Polls such as AAII and CNN’s Fear and Greed Index have rebounded from overly pessimistic levels. VIX has given back nearly 50% of its value over the last month and speaks to the degree that “no surprises” have happened to markets despite a plethora of ongoing pessimistic news.
Fear and Greed’s current reading shows a “Greed” reading of 66, well above mid-March “Extreme Fear” readings from last month. While not a sell signal per se, this does merit watching carefully over the next couple weeks. Any evidence of this gauge exceeding 75 at a time when VIX falls further into late April and indices become short-term overbought could give a temporary exit sign for market participants who might be more short-term oriented in their approach.
Note, that these readings directly go against some of the CFTC readings I presented in recent weeks. High Cash levels, negative S&P futures positioning by non-commercials through CFTC, are all thought to represent bearish sentiment. From a contrarian perspective, these are bullish for the prospect of further market gains.
Thus, sentiment tends to be useful at extremes, such as what was seen back in October 2022 and March 2023 near pessimistic levels, while early February showed quite optimistic sentiment. The key takeaway following the rally into mid-April is that sentiment has improved. Yet, more will be needed to consider this important, and from a contrarian perspective, for this to be bearish for risk assets.