Macro Wrap – Overbought?

by Enis January 23, 2013 8:03 am • Commentary

The SPX is up 5 straight days in a classic, low-volatility rally.  In fact, the U.S. stock market hasn’t moved much since the first trading day of the year, when it rallied 2.5%.  10 day realized volatility on the SPX index is around 5, and the VIX at 12.4 indicates that the market doesn’t expect volatility to pick up much.

A chart I’ve seen in many places this week shows the number of NYSE stocks trading above their 200 day moving averages:


Courtesy of Bloomberg
Courtesy of Bloomberg

The figure reached 80%, a level that has not been reached since the spring of 2011, and before that, the spring of 2010.  That strong breadth has been interpreted differently depending on the trader’s bias, with some saying that it’s a sign of a healthy underlying market, and others saying that it’s an obvious sign of a market that’s overbought.

I see both sides of the argument.  However, I prefer to focus on single stock stories here, especially during earnings season, and especially since the VIX at 12.5 signals stock indices are likely offer fewer trading opportunities than single stocks.  The best illustration of that is to look at SPX correlation, which shows how closely SPX index components are moving together:

Courtesy of Bloomberg
Courtesy of Bloomberg


As you can see, ever since the start of the year (and the end of the fiscal cliff debate), correlation has been around 0.35, whereas it was closer to 0.60 in the last couple months of 2012.  In this environment, single stock movements dominate.

Markets overnight:

  • Asia was mixed around the unchanged mark, with the exception of the Nikkei, which was down 2%, after yesterday’s disappointing BoJ meeting.
  • Europe is down 0.25%, and SPX futures indicate an unchanged open.
  • The dollar is a touch weaker, and Treasury bonds stronger, with commodities close to flat.
  • GOOG and IBM are both trading up between 4-5% after strong reports.