Macro Wrap – Gap-and-Go or Jump-and-Slump? $SPX

by Enis September 16, 2013 8:32 am • Commentary

SPX futures made a new overnight high, implying a new all-time high for the S&P 500 index if the market opens where futures are currently trading.  The bull market rally since the March 2009 low has been extraordinarily strong.  Since the start of 2010 though, the major advances to incremental new highs have come on just a few big pushes.

The chart shows each instance where the S&P 500 made a new bull market high since early 2010:

Daily chart of the S&P 500 index, 200 day ma in black, Courtesy of Bloomberg
Daily chart of the S&P 500 index, 200 day ma in black, Courtesy of Bloomberg

The green arrows indicate each new bull market high in this bull market.  Interestingly, the bulk of the advance between the start of 2010 and the mid-2011 high occurred on one large advance at the end of 2010 and the start of 2011.  The index did not advance much from that mid-2011 high until the end of 2012 (as each green arrow was short-lived in duration).

But in the first half of 2013, the nature of each advance to new highs in the S&P 500 has been much different.  In fact, the three big pushes in 2013 moved the index 260 points higher, nearly the same point advance as the entire move in the S&P 500 during the 3 year period from the start of 2010 to the end of 2012.

Clearly, the extent of the advance in 2013 has been exceptional.  The question now becomes – will this new green arrow to a new all-time high be more like most of the small moves in 2011 and 2012, or will it be the start of a longer-duration advance like 3 of the 4 new highs in 2013?

The bull and bear case from a macro perspective:

Potential bullish points-

  • Many other large global equity markets are also making new highs, most notably in Europe.
  • Equity markets shrugged off high oil prices during the Syria debate.  With a global resolution looking more likely, and oil breaking or about to break its intermediate uptrend, the oil headwind becomes an oil tailwind.
  • Similarly, equity markets shrugged off higher interest rates.  If rates decline, that’s an additional potential tailwind for stocks.

Potential bearish points-

  • Breadth has steadily deteriorated (new highs, number of stocks above 200 day moving average, cumulative advance-decline) since the May 2013 high
  • Commodity prices (gold, silver, copper) and TIPS (Treasury Inflation Protected Securities) signal less of an expected inflationary environment than 3 or 6 months ago, which has correlated to reduced stock returns during this bull market.
  • Emerging market currencies, which have historically been a measure of broader risk appetite globally, are still much lower than their levels 3 or 6 months ago, even with the recent rally.

The long-awaited FOMC decision is on Wednesday afternoon.  Whether it’s a gap-and-go or a jump-and-slump move this week will likely be much more clear by Friday.