Volatility in the markets is unusually low. I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they'll take more risk than really what's appropriate.
-- William Dudley, President of the Federal Reserve Bank of New York
It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.
-- Mark Twain
As an example of increased risk taking, issuance of low-rated US dollar-denominated junk bonds last year hit a record $386 billion, more than twice the level reached in the years before the 2008 financial crisis.
But the risk has a twist. It seems like the risk being taken has more to do with fear than greed. Investors have been forced to reach for return -- of any kind -- wherever they can find it. As an example, there is presently $4 invested in stocks for every $1 in money markets. This is almost 20% above the levels in 2007.
Last week, an Investors Intelligence Survey showed the highest percentage of bulls in 10 years.
Is it possible that the larger complacency is due to the sense that there will be no unintended consequences to the most unprecedented monetary experiment in history?
Juxtaposing these two things -- the biggest experiment in monetary history with historic readings in complacency -- is stunning.
Long-time readers of my Daily Market Report will recall that the fall of 2012 was set to be a major turning point. The presumption was an idealized turning point would occur in October 2012, that being 120 months from the October 2002 low and 60 months from the October 2007 high.
Mr. Market has a good curve ball. There was a high in September, leading many cycle analysts to believe that the cycle came in one month early. Then there was a behemoth (in hindsight) low in November 2012. September and November bracketed the idealized October turning point.
Then came the January 2013 impulse, and the market never looked back. The explosive kickoff in January 2013 underscored the notion of a major low in November 2012.
Monthly S&P 500 Chart From May 2008:
So, November 2012 should be a good reference point from which to measure the ensuing trend.
In fact, underscoring the significance of the January 2013 momentum was the S&P 500 (INDEXSP:.INX) breaking out over 1,440. Why is 1,440 important? It was the pre-crash pivot high in May 2008. Notably, 1,440 aligns with mid-May, so the pivot high in 2008 was a time-and-price square-out.
Since the cycle low due in the fall of 2012, the S&P has achieved higher highs in 18 out of 19 months. This matches the 1985 to 1986 record run, going back to 1928. So, as you can see, there is some symmetry with the 27-year-and-85-year vibrations pointing to 2014 as shown in yesterday's Daily Market Report [subscription required].
Since June 2013, the S&P has made higher highs each month for 12 consecutive higher monthly highs. The market is shrugging off being stretched and "don't fight the Fed" feels like it has been replaced by "don't fight the trend." The question is, with the vast majority inured to every correction since they have been buying opportunities for five years, how will players recognize a turndown that deserves to be acted on? The question is, will there be a graceful exit for those who have an exit strategy in mind, following such a relentless stretch that seems to be on a new trajectory higher, with the assumption that protective stops have been cinched up? Or am I just being silly assuming that "exit strategy" is still in the speculative lexicon -- that any turndown will be viewed as a buying opportunity? That's fine, but what will players be using for buying powder with $4 invested in stocks for every $1 in money markets?
Let's take a look at the vibrations off the November 16, 2012 low of S&P 1,343.
As of Tuesday (June 10), the November 2012 low was 571 days ago. Adding 571 to 1343 gives 1914 for a 1 x 1 or one-point-per-day angle. This 1 x 1 line should be informative going forward. Notably, it will tie to our 1920 pivot going toward triple-witch expiration and going toward quarter-end. The behavior on a break below this 1 x 1 angle going forward should be watched carefully. Since the march higher has been so persistent, the presumption is a break below this angle could see a bit of an air pocket.
Interestingly, 90 degrees square 1,343 in time ties to mid-April, the last swing low. Going 180 degrees opposite 1,343 aligns with mid-July, the primary high 2007.
It looks like the backtest from 195 to 190ish SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is on track. The indication stands for my early June, early July, and October turning points. Going 90 degrees from the S&P April pivot high ties to early July while 180 degrees opposite early April is early October.
I hear a lot of talk about what folks know for sure: the trend is up, the market is obviously going to extend and may melt-up from here justified by an economic recovery finally taking hold. Perhaps, but isn't the market supposed to discount the future? Likewise, the persistency of the trend from October 2011 and November 2012 have reinforced the notion that surely there will be a graceful exit. This fall should be a doozy.
Form Reading Section:
Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) Daily Chart:
Arista Networks (NYSE:ANET) 10-minute Chart:
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