David Fabian: The word around the financial community right now is “boring”. The stock market has entered a phase of miniscule price movements, low volume metrics, a multi-year low in volatility, and uncertain economic data. In short, equities are boring us to death one slow day at a time.
The problem is compounded by the fact that the SPDR S&P 500 ETF (NYSEARCA:SPY) is sitting close to all-time highs and defied nearly every “top” that experts have predicted. This has many traders sitting on their hands or frustrated with the lack of movement in existing positions. No one wants to add up here and no one wants to make the mistake of shorting this resilient market either. It is a conundrum that can only be resolved through time and price.
Months of choppy action in equities have resolved in SPY gaining a modest 5% on the year. However, the underlying sector movement has shown a much different story. The Consumer Discretionary Select Sector SPDR (NYSEARCA:XLY) is sitting in negative territory and clinging to life support with first quarter GDP showing its first negative print in years. On the other side of the spectrum, the Utility Select Sector SPDR (NYSEARCA:XLU) has gained more than 14% this year on the back of falling interest rates and defensive repositioning.
The most recent data on the CBOE Volatility Index (VIX) shows a reading under 12, which translates to a lack of fear and general complacency in the market. In addition,investor sentiment readings continue to show the majority of investors in a neutral stance, i.e. lacking a bullish or bearish conviction to gain an edge.
Everyone appears to be waiting for the next shoe to drop while stifling a yawn and looking over their holdings.
So where do we go from here?
The majority of active investors are trying to divine what the next big move will be. After months of rallying in tandem, stocks and bonds are at the top end of their range and are starting to show some signs of indecision. The two most likely scenarios of course are: (1) stocks continue higher with a selloff in bonds or (2) the much anticipated equity correction materializes this summer and interest rates fade alongside them. This would be supportive of bond prices with the exception of credit sensitive holdings.
While there is an outside chance we will see additional positive correlations in both stocks and bonds, I believe that we are overdue for a divergence that lends itself to a more traditional balance between the two asset classes. This would assert a more conventional ebb and flow between risk and safety that would break the cycle we have seen so far this year.
In the very near term, I would not be surprised if SPY dipped back down to re-test its 50-day moving average and provide an additional layer of intrigue for bulls and bears.
These tests have been a common occurrence every few months as we have made our way higher and will provide another opportunity to shape portfolio changes based on fundamental or technical data.