A 'hot hand' eludes investors at Wall Street's blackjack table
It’s as if this market is a game of blackjack. It keeps going for 21. But when the cards add up to more, the hand is busted, bettors lose their money and a new set of cards is dealt.
Since reaching 2100 for the first time in history on Feb. 17, the S&P 500 (^GSPC) index has crossed that level on 35 different days, or nearly twice a week.
It did so again on Tuesday, as the rapid rebound of the prior two sessions was gently extended. The macro headlines slowed, oil prices gained on a “buy the bad news” reaction to the Iran deal and just-good-enough earnings reports arrived. A nitpicky observer might argue that it wasn't ideal for stocks to climb on light volume and on a day that saw soft economic data and a dip in Treasury yields. But these, for now, are forgivable shortcomings.
There is no particular cosmic or even technical significance to the 2100 line, necessarily. It’s just a level near the upper end of the longstanding trading range where – so far – the risk-reward bargain has turned against the bulls.
The dominant pattern this year has been sharp moves in either direction, all contained within the tightest six-month trading range in history. As the index has reached toward the highs, trader sentiment has become overexcited or Fed-tightening fears or the oil crash or a Greece plot twist conveniently arrived to give an excuse for selling.
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Yet on relatively minor dips of a couple or three percent, investors’ mood has turned rather fearful, the flight instinct kicks in hard and markets have become pretty quickly oversold - even as not much changed about the economic fundamentals.
That’s what happened as the Greek referendum and China stock market crash reached a noisy crescendo in the past couple of weeks. The monthly Merrill Lynch Global Fund Manager survey, released yesterday, showed fund cash levels had risen to their highest point since the Lehman collapse. This is bullish for the risk markets, all else being equal, as it shows lots if risk-aversion already expressed.
So does this mean the market has a better shot to decisively rise above 2100 for a while this time?
It’s always impossible to say, but to the extent the focus can remain on corporate results amid rather undemanding profit expectations it has a decent shot.
Most investors would rather be trying to project Netflix Inc.’s (NFLX) subscriber-growth trend or Intel Corp.’s (INTC) gross margins than handicap the Greek parliamentary vote. So even if the reactions to company reports is mixed, muted forecasts and an instinct to forgive currency-related shortfalls suggest earnings season will help clarify the outlook for a second-half acceleration in business.
The collapse in market-volatility expectations in the past several days has been breathtaking, as measured by the CBOE S&P 500 Volatility Index (^VIX). This indicator of traders’ anxiety-related hedging plunged from near 20 to under 14 in less than a week.
Typically, this kind of spike peak in the VIX implies the market has stabilized and has some room to lift further. It could also mean that the markets are prepping for a typical midsummer torpor that can set in around this time of year.
Maybe this would be welcome given the uncomfortable macro drama of recent weeks. But with Fed Chair Janet Yellen speaking to Congress, the Chinese market still fibrillating and the S&P again hugging that 2100 line, it’s hard to be a confident bettor right now.
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