The French election has proved to be a bigger “relief” than many (including me) had thought.
While it was clear the election could be a volatile event, it was not obvious that there were so many investors sitting on the sidelines waiting to buy.
As a result, there have been two very strong days in the broad market. The S&P 500 Index
gapped higher twice. That alone is highly unusual. So it turns out that the pennant (red lines on the accompanying chart) that had formed was indeed a launching pad for what has so far been a very strong rally.
All that remains to turn the S&P 500 chart bullish is for it to close at a new all-time high. Some indices have already done so, including the Nasdaq Composite and the Nasdaq 100
Others are close, such as the Dow
the NYSE Index
and the Russell 2000
As it is, though, a cynic might still say the S&P 500 is still within the 2,322-2,405 trading range (horizontal lines on the accompanying S&P 500 chart).
It is interesting to note that only seven trading days ago, the S&P 500 closed at its lowest price since the March 1 all-time high (2,329). The bears seemed to be in control. All that remained for a downside breakout to be confirmed was for the S&P 500 to drop below the March lows at 2,322. That never happened. Now, just a short time later, the bulls seem to be in charge. The S&P 500 is testing the top of the trading range, and all that remains to confirm a bullish outlook is for the index to close at a new all-time high. A failure would mean that the trading range scenario is still in effect.
The equity-only put-call ratios had given sell signals in early March and were having trouble gaining traction from those sell signals. The standard put-call ratio did not exceed the previous 2017 peaks, so its advance during the sell signal was weak. The weighted ratio — which we feel is a more trustworthy indicator — did make new 2017 highs. But the ratios began to reverse themselves amid the market bottom a couple of weeks ago, and now they have rolled over to buy signals.
Market breadth has been positive, but not overwhelming, during the rally over the past seven trading days. On the breakouts in the past two days, breadth was barely 2-to-1 in NYSE terms and 3-to-1 in “stocks only” terms (i.e., three-plus advances for every decline). Breadth just doesn’t expand in this era of “Trump stocks.” Normally one would expect to see a “90% up day,” or something close to it, on a two-day advance of this sort. But this lack of extremely strong breadth has not been a problem for this market in the post-election rally since November, so one should not try to make something negative of it.
Our breadth oscillators remain on buy signals and are now moving into overbought territory. A severely overbought condition, accompanied by an S&P 500 breakout to new all-time highs would be a positive confirmation.
A quick aside: New highs are rocketing off the charts (252 on Monday and 301 on Tuesday). That is a positive factor, especially since new lows continue to remain in the teens on a daily basis.
Volatility indices have been perhaps the most interesting area of the market in the past few weeks. First, they all broke out to the upside as the French election drew near. Even larger moves occurred in the European volatility indices. While the media was trying to say that the VIX advance was in response to tensions with Korea or Iran or Russia, or whatever, they were missing the point: It was the threat of “Frexit” (French exit). Once that threat passed, volatility indices virtually collapsed.
The budding uptrend in VIX had been bearish for stocks, but that is history now. It should be noted that the decline in VIX did not produce a VIX “spike peak” buy signal — at least not by the definitions of that trading system, as we have determined them. However, there were buy signals when VXST (the short-term CBOE Volatility Index) and VIX rose above the levels of the longer-term CBOE Volatility Indices (VXV and VXMT) and then fell back below them.
Now, with VIX at low levels, it is in a trendless state, and stocks can continue to rise while that is the case. VIX may have gone a little too far on the downside, though, creating an overbought condition of sorts. VIX is below 11. Yesterday’s low was 10.22. VIX has not traded at such a low level since February of 2007!
Shortly after that, in 2007, a sharp but short-lived market decline pushed VIX higher and it never got back to those levels again (until now). Perhaps even more eye-opening is that the “old VIX” — VXO — is below 10 once again (and even below 9, if one can believe yesterday’s closing print was not an error).
The construct of the VIX futures and of the CBOE Volatility Indices has returned to a modestly bullish state. During pre-“Frexit” trading, the term structure inverted in the front end. That was a negative sign for stocks. But now that the French election is over, the term structures once again are sloping upwards, and the VIX futures are trading at premiums to VIX. Those are bullish signs.
In summary, none of our indicators are on sell signals any longer, although since there are some overbought conditions, it is possible that sell signals might occur in the near future. We do not anticipate signals, though, instead preferring to wait for them to be confirmed.
So the market has gone from slightly oversold and probing a breakout below the lower end of the trading range of the S&P 500, to more than slightly overbought and probing a breakout on the upper end of the trading range. If some sell signals should appear with SPX near the top of the range, we would take them. And if the upside breakout occurs, we would reluctantly do some buying. But for now, we are just watching to see if confirmed signals arise.