The average price for the last 100 days for the S&P 500 (SPX) has been about 2190, or about 3.5% below Friday’s close of 2271. While the sense is that the stock market surged following the election, remember much of the move came as a reversal of pre election selling and a massive move lower in the futures on election night. Since the election the SPX is only up 6%, and up only 3.5% from the pre-election prior highs in August. And since those wild swings in November, the market has essentially stalled. Since December 8th, the index has traded within a 2% range, with volatility nowhere to be seen. The consolidation in December and January is either forming a healthy near term base to serve as a launchpad to higher highs, or possibly a diving board lower. Obviously it’s a coin flip. But when I consider the low levels of equity volatility (VIX 12!) and the high levels of investor sentiment, I see a level of complacency, versus the uncertainty of economic policy in the first 100 days of a new administration. Something feels out of whack.
A pullback to the 2190ish, the convergence of the index’s 100 day moving average, the mid November breakout level and the uptrend from the 52 week lows made in Feb 2016 looks like reasonable near term downside target:
Looking out about 100 days, the options market is implying about a $100 move in the SPX between now and April expiration, or about 4.5% in either direction. That seems fair as the likelihood of spot VIX goign as low as a hat size is not great. Any vol spike is likely coinciding with a move back to the support level identified above.
There are a couple paths the SPX can take. As we get through Q4 earnings and if guidance is viewed as supportive of current valuations, we then get to the Fed’s Feb 1 meeting. If that commentary remains Goldilocks-esque, then I suspect the index starts to grind higher, and the VIX melts. I don’t think there is a risk to a melt-up, a slow grind is likely the path higher, if it happens.
On the flip-side, if the assumption of greater economic growth does not materialize, and rising rates and the relative strength of the dollar remain a headwind for SPX earnings, 2190 is a no-brainer by the end of Q1. With the potential for a very sharp decline back to the Nov lows near 2100 a possibility. If that happens that level should serve as staunch near term technical support. Volatility risks remain skewed to the downside.