SPDR S&P 500 ETF Trust (SPY): The Pullback Is Likely to Be Shallow
While Tuesday’s rout in the banks (BKX -3.9%) and the ongoing decline in Crude Oil represent legitimate concerns, the overnight action around the world and the charts contained herein suggest that risk appetite remains intact and that yesterday’s 1.2% decline in the S&P is more likely to represent typical volatility within a strong trending market, rather than a more sinister reversal in trend which marks the end of the Trump/Reflation trade.
Volatility (VIX) is lower to start the day having failed into resistance at 13; Europe remains remarkably well bid with Italy down a mere 12 bps and European banks off 1% (BKX -3.9%); and declines across the Emerging Markets are inline/smaller than the S&P’s even with WTI and Brent staring into the abyss of breaks below 47 and 50.
While the action is poor in the pits and confidence low, I maintain that the current decline in Crude is really no different than the previous two declines of this magnitude over the past year which resolved meaningfully higher in price. The Dollar Index is sitting on critical support at the 150 and the Euro is into resistance around 1.08 and I get the sense DXY strength (my call) would be coincident with “Risk On.”
The Russell has been a glaring underperformer on the back of that weaker Dollar and should the DXY hold, so shall the Russell at critical support with positioning now shorter than heading into the election. Transports broke lower Tuesday, but FDX delivered a nice surprise overnight which should help the cause as the biggest (13%) weighted stock in the Index. The selling in banks bordered on indiscriminate and should represent a buying opportunity for the “waiting for a pullback” crowd.
Yields are not great, but not broken -20bps from the highs. Glencore is holding its 50 day against this maelstrom which is Bullish for reflation. In sum, I’m not telling you there will never be another downtick, but I am telling you the pullback is likely to be shallow, the trend is intact and the call stands.
Related tickers: SPY, VXX, UVXY