The yield curve is flat. The 10-year note is currently yielding as much as the one-month treasury. This is the bond market’s way of forecasting a potential recession down the road. Was Friday the day the stock market woke up and started to discount the same? It is too early to say. One down day doesn’t make a trend.
Small caps are looking ominous with that high-volume reversal off their 200-day moving average on Friday. Many tech momentum stocks are quite extended and also vulnerable to quick 5-15% pullbacks.
After a big run in January and the first half of February, the S&P 500 is consolidating in a tight range above its 200-day moving average. While some of the tech leaders are starting to lose upside momentum and the FANGs are treading water, there are quite a few other sectors that are stepping up to the plate. Biotech had a monster breakout last week and it is likely to remain the pond to fish for active traders in the next few weeks.
People are obsessed with catching bottoms and tops. One can understand the fascination with this market approach. It’s based on a mean-reversion, which is contrarian by nature and everyone wants to be a contrarian. It has the potential to deliver a reward multiple times bigger than the taken risk assuming you are willing to cut your losses quickly. It looks good in theory but it is too hard to implement in practice. In the long-term, playing against the established trend is a losing proposition for most market participants. Focusing on capturing parts of trends is a much more common-sense approach, which can deliver a lot better return with a lot less hassle over time.
The small-cap index, Russell 2000 (IWM) is up 18% for the year and kissing its 200-day moving average. The market continues to react mostly favorably to earnings. Market breadth hasn’t been so good in years. We see strength in so many different sectors and countries – solar, biotech, enterprise software, semiconductors, gold, palladium, Brazil. Even Chinese names have started to break out and hold their gains. It’s hard not to be bullish in this market environment.
I will be watching closely how the SPY will react near $280, which has been a major area of resistance for a long time. If it breaks and holds above it, there are no significant stops before new all-time highs.
U.S. stocks continue to climb a wall of worry. SPY is already up 20% from the Christmas lows and is quickly approaching $280, which has been a major area of technical resistance in the past year.
While tech stocks are taking a little break after a strong run in the first few weeks of the year, we are starting to see quite a few other sectors breaking out and setting up – biotech, healthcare, transportation, energy, financials. Things are almost too good to be true.