Following the big autumn swoon and subsequent powerful rally to new highs, the volatility of
the market has calmed some and the pattern has fallen into a period of whipsaw action that has been
drifting very slowly toward price compression. Despite all the pivots up and down, the SPX has
managed about a 7.5% annualized return over the past six months but has been drifting mildly
lower since the end of 2014. Uptrend lines have been violated, but the market has not been able
to sustain a break as investors and traders struggle to find solid footing. Periods like this do
ultimately resolve but it is rarely clear how they will, and to make matters more complicated,
the first move out of the range can turn out to be a head fake that traps the eager.
There will be no conventional sell signal on this market until both short and long interest rates
start to rise, and monetary liquidity growth becomes considerably more constrained. Moreover,
there remains a goodly number of players out there looking for the p/e ratio to continue to
rise on low inflation and interest rates no matter how humble progress in earnings turns out to
be. As well, investors are factoring in additional liquidity from the transfer of wealth to the
US as a net consumer of oil and as time passes, analysts will continue to point out that net
petrol consuming companies will have bottom line benefits to offset declining earnings from
the net oil producers.
On the other side, the mantel of significant QE has been passed to Europe and Japan, and,
without the US QE tailwind, some players are concerned by the recent slowing of US economic
growth momentum. Moreover, there is growing interest in major markets such as the EU,
Japan and China. Finally, both gold and longer dated US Treasuries have been attracting funds
from the US equity market.
The environmental background reveals enough pluses and minuses to keep US equities
players guessing and second guessing. SPX Daily Chart
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!