The S&P 500 closed at the highest level of 2016 on Tuesday. Thus, one couldn’t be blamed for thinking that oil had also enjoyed a good day. After all, the oil/stock correlation game has been the hallmark of the stock market for quite some time now. But, of course, that assumption would be wrong as stocks and oil actually diverged yesterday.
Instead of focusing on the action in the oil pits, it appears that stocks celebrated Janet Yellen being, well, Janet Yellen. And while the correlation trade has had a strong grip on the stock market this year, everybody knows that dovish Fedspeak trumps just about anything and everything.
And dovish is really the only word that would be appropriate to describe Ms. Yellen’s speech to the Economic Club of New York on Tuesday. In short, Fed Chair Yellen said that caution in raising rates is “especially warranted” at this time. As such, traders immediately scratched the potential for an April rate hike from the board.
Yellen also talked about the importance of the Fed’s data-dependent mantra. She told the audience that data surprises can be quickly reflected in market expectations about the future path of monetary policy. Ms. Yellen went on to discuss the Fed’s ability to use conventional monetary policy to respond to economic disturbances as being “asymmetric” and stressed the potential for further stimulus.
Wait, what? Further stimulus? Isn’t the Fed in a tightening mode at the present time? Isn’t the number of rate hikes in 2016 the focus here?
Yep, that’s right, Ms. Yellen continued to stress the idea of the FOMC being data dependent and mentioned the potential for further stimulative action should the data warrant such a move. In the speech, Yellen highlighted the risks to US economy from global developments and flagged concerns about tighter financial conditions, slower global growth and China’s currency policy uncertainty.
And finally, the Fed chairwoman expressed concerns about falling inflation expectations and reiterated uncertainty about recent uptick in inflation.
So, despite crude falling 2.6% yesterday and Texas Tea threatening to break down through recent support, stocks enjoyed a strong session, bolstering the argument that the bulls are back and that the recent “mini bear” has indeed ended.
However, there are still at least a couple reasons to remain skeptical of the stock market’s recent joyride to the upside. First and foremost is the correlation trade with oil. You see, one day does not a trend break. And the bottom line is that I’d like to see stocks continue to go their own way before fully embracing the idea of a new cyclical bull.
Then from a technical viewpoint, it is clear that the bulls have some work to do still before we can break into a chorus of “happy days are here again.”
S&P 500 – Daily
From a short-term perspective, the bottom line is stocks are overbought, there is heavy resistance overhead, investor sentiment is no longer a tailwind, valuations remain high, and oil could become a problem again at the drop of an algo. Cutting to the chase, it would appear that a pullback would seem to be in order right about now.
Yet it is important to remember that Ms. Market likes nothing more than to fool the masses when “obvious” moves are at hand – such as the expectation for a pullback in the near term. So, should the major indices continue to simply ignore the overbought condition and/or find a way to move higher in the face of a pullback in oil, I’d be inclined to side with the bulls and prepare to buy any/all dips in the coming weeks.
But if given a choice, I’d much rather see how stocks during a pullback, especially a pullback that was caused by falling oil prices, before jumping on the bull bandwagon. Then again, one has to play the hand that is dealt in this game and not the one they’d like. So, I’m thinking that the next couple weeks will likely be quite telling.