While the Dow spread its wings to within striking distance of the 13,700 mark and the Nasdaq Composite hit its highest point since February 2001, it was the record achieved by the S&P 500 Index (SPX - 1,536.34) that was especially notable. The broad-market index finally notched a close above 1,527.46, its all-time closing high from March 24, 2000. The index ended the week nearly 10 points above this threshold, and is now staring down its all-time intraday peak of 1,553.11
This achievement in the SPX managed to grab a headline or two, but there certainly wasn’t a broad sense of euphoria accompanying the new high. The vague ennui of the investing public reminded me of the collective “yawn” I perceived several weeks ago after the Dow muscled above the 13,000 level. On April 30, I noted that: “Past breakouts had been met with a great deal of hoopla on Wall Street, but this one seemed to pass with more of a cringe and a groan, which is more encouraging than the rampaging enthusiasm that accompanied the technical breakouts we saw in the early months of 2000.”
Caution and skepticism prevail across Wall Street and Main Street, as investors have yet to fully buy into the market’s upward momentum. Institutions and hedge funds, which dominate trading in the U.S. market, continue to hedge their long positions by shorting other stocks, shorting index futures, and purchasing index put options, which are among the most-active options on a daily basis.
Mutual-fund players aren’t terribly sanguine either, preferring to avoid the playing field. In 2000, when the SPX was last in the 1,550 area, domestic stock funds enjoyed $259 billion in inflows. As of the end of April, domestic stock funds are on pace for only $63 billion in inflows this calendar year, as investment dollars continue to chase overseas markets. All of the broad indices are hitting new highs, yet the public is still not engaged. As contrarians, this is a welcome indication that plenty of money still lingers on the sidelines.
As an example of the pervasive shorting activity that continues as the market achieves new all-time highs, odd-lot short selling continues to build momentum. The smoothed 20-day moving average of odd-lot short positions has been slowly building up speed for the past 2 years and is now near a 7-year peak. Some are viewing the increased shorting activity as the work of hedge funds and thus not an indicator of pessimism surrounding stocks, with the implications being that short interest can no longer be used as a contrarian bull signal. My view is that regardless of the motivation for the huge short positions, they have to be unwound at some point in the future and thus represent future buying power.
Turning to the CBOE Market Volatility Index (VIX: sentiment, chart, options) , I have a few notable observations. The so-called “fear barometer” continues to respect the confines of the 12.50 and 14.25 levels as lower and upper bounds, respectively. The market will tend to struggle as this lower boundary is hit, while it tends to rebound strongly when the upper boundary is reached. Recently, these levels are regularly touched within a day or two of each other.
Meanwhile, the 30-day historical volatility reading on the SPX has been in a 9-10% range over past month, so VIX “premium” strikes me as being larger than normal. It could be that put sellers are no longer willing to accept the lower VIX levels of earlier this year, and put buyers jump in sooner on VIX pullbacks. Considering that this pattern is taking place amid a market making new highs, I view this activity as bullish, as put buyers are willing to pay higher premiums for portfolio protection, whereas the expectation would be that they are becoming more optimistic and thus unwilling to pay a premium for portfolio protection..
Additionally, even with the market at all-time highs, VIX futures remain flat, indicating an unusually high expectation for short-term volatility that has in the past always been associated with market weakness as opposed to the current upside momentum. Big volume on out-of-the-money VIX call options also continues to bear watching, as some investors are looking to cash in on a “VIX pop” that would result from a huge decline in the market and such expectations have a way of not being realized.
Overall, this landscape strikes me as quite bullish in its implications and provides a strong rebuttal to the “low VIX/complacency” argument that’s still out there.
This week, the economic calendar is fairly light; we’ll learn the results of April’s factory orders, wholesale inventories, and consumer credit and analyze the latest weekly crude data. Earnings season is certainly on the home stretch, with the retailing sector coming into focus. Among the names on deck for the earnings spotlight are Jos. A. Bank Clothiers (JOSB: sentiment, chart, options) , Guess (GES: sentiment, chart, options) , and Dollar General (DG: sentiment, chart, options) . We could well see another record or two, but don’t hold your breath for any high-profile celebrations.
