From my perch, the key takeaway from the action in the stock market over the past two weeks is that uncertainty has returned in a big way to the corner of Broad and Wall. After romping higher from February 12 through April 1, suddenly the outlook for stocks has become murky. Gone is the fear that the crude’s rude move was going to wreck the global economy. Gone is the worry that systemic risk had returned and that investors were facing a redux of 2008. No, after a 13.3% “sigh of relief rally” in the stock market, which pushed the S&P 500 back to within spitting distance of a fresh all-time high, the question has become, where do we go from here?
To be sure, stocks have been waffling back and forth lately. Down one minute, up the next. With the end result being a sideways trading range – aka a “consolidation phase.” The bulls argue that the current trading represents a pause in the action and that a new upleg is underway. On the other side of the court though, our furry friends from the bear camp remind us that all is not well in the world and that the next logical move in the stock market is down.
In my humble opinion, a glance at the current daily chart of the S&P paints this picture rather nicely.
S&P 500 – Daily
And then if one steps back and looks at the situation from a longer-term perspective, it is also clear that neither team can claim control of the game at this time.
S&P 500 – Weekly
While technical analysis is more art than science – especially these days when every investor on the planet has charts at their fingertips 24/7 – I can make the argument that the bulls have yet to break out of the downtrend that is evident on the weekly chart of the S&P. And until this happens, the stock market is likely to remain vulnerable to any/all bad news.
But before you run out and start loading up on those levered, inverse ETFs because the next move is “so obvious,” let’s also consider that stocks have run a very long way in a very short period of time (again) and that a pause in the action is to be expected. And I do believe that the bulls have earned the benefit of the doubt here – as long as the S&P can stay above 2000, that is.
What Me Worry?
However, the market’s “issues” have returned over the past week or so. And while I believe that the current sloppy action may indeed represent a consolidation phase when all is said and done, it is always a good idea to understand your opponent’s point of view. So, let’s spend our remaining time on this fine Friday morning exploring the bear camp’s primary concerns.
Below is an executive summary of the worry list making the rounds with a brief description of each.
- The Yen: In case you haven’t noticed, the yen is soaring this week. The worry here is two-fold. First, there is the fear that the BOJ has lost control of the situation. And second, it is important to understand that the unexpected move higher in the yen causes pain in carry trades, which creates short-covering, which yada, yada, yada…
- The European Banks: Don’t look now fans, but the banks, especially the European banks, are having a rough go of it again. Take a peek at the chart of Deutsche Bank (NYSE: DB) and you’ll see what I mean. The fear here is that there is trouble on the balance sheets of the European banks that has not been recognized at this time. In addition, negative rates don’t help the situation at all.
- The U.S. Banks: Take a look at a chart of the banking index or the SPDR S&P Bank ETF (NYSE: KBE) and you’ll see that while the situation in the U.S. isn’t as bad as it is in Europe, the trend of the U.S. banks isn’t going in the right direction. It is also worth noting that the problem isn’t limited to the banks as the entire financial sector appears to also be struggling. And as the saying goes, the stock market can’t rally (for long) without the financials.
- The Commodity Complex: In addition to what could be described as a resumption in the decline in oil, traders point to the action in “Dr. Copper” (NYSE: JJC) as a reason to worry. The thinking is that falling prices in commodities is a strong proxy for the state of the global economy. The good news here is that steel (NYSE: SLX) isn’t breaking down. As such, the situation with copper may be more related to fears that the Chinese could soon release their stockpile of metals on the market. This remains something to watch.
- The 10-Year: In case you haven’t noticed, the yield on the U.S. 10-year closed yesterday at the second lowest level of 2016. The takeaway here is the economy is not heading in the right direction. ‘Nuf said.
- The Earnings Parade: Ready or not, it’s time for another earnings parade to begin. At issue here is the fact that earnings have been in decline. As the recent GDP report revealed, corporate profits have now fallen for 5 straight quarters. And the bottom line is this trend can’t continue if the bulls have hopes for a sustainable move higher.
So there you have it; the laundry list of fears and worries that help explain the recent sloppy action in the stock market is indeed impressive. However, looking at the action this morning, we find that oil is spiking up more than 5% and surprise, surprise, European bourses and U.S. stock futures are following suit. As such, we should conclude that until one of the teams can make a meaningful break of the key lines in the sand, the uncertainty will likely remain in place. And this means that sideways action should also be viewed as “normal” at this time.