Two Bright Spots for the Bears
The market blasted lower to start the week on Monday morning and the bears looked firmly in control. But as we have seen countless times since October, and really for the past few years, the bulls mustered a defense. The bears were again left scratching their heads after another pullback attempt was thwarted by the relentless enthusiasm of buyers.
Yesterday, the SPX dropped more than 1% to start the morning. But the index managed to close only 0.25% lower to end the afternoon. So not only were the bulls able to defend support zones, they managed to rally most indices back to even for the session.
Last week our big resistance zone to watch was 1332. And the SPX hit 1333 and quickly fell to the next support zone, 1301. Yesterday SPX nailed 1301 before it reversed by a full percent higher to 1313.
While short-lived, yesterday's pullback had purpose. Along with the sideways fade over the past week most of the major indices were able to work off an overbought condition.
Even though there wasn't a large pullback, SPX has been stuck at this exact level for over two weeks now. It didn't really go down, but it had stopped moving up. I still like the bears' chances of bringing SPX back down to 1301 again before another rally starts, but from a technical standpoint SPX is fully recharged.
Fundamentally, there isn't much reason for the indices to rally. Earnings season has been good, but most companies have beaten expectations because estimates were lowered 30 days before earnings season began. And although historical valuations are low, current EPS growth estimates are also low. So it doesn't make sense for stocks to trade at 17 times earnings, or more.
Despite the optimism throughout all of January, the bears have a few near-term things working in their favor. First, bank stocks were obliterated yesterday. As I have mentioned over the past four months, bank stocks need to be leaders during this rally, and for the most part they have been.
Yesterday, bank stocks were not able to recover like most of the other sectors did, which might mean that our leadership group is telling us a decline is coming. Big bank stocks like Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Bank of America (NYSE: BAC), Citi (NYSE: C) and JPMorgan (NYSE: JPM) need to recover today.
The second bright note for bears is that the VIX popped yesterday. Implied volatility has been dreadfully low for the past three weeks. But the VIX bottomed at 16.80 on Friday and rallied 21% up to 20.33 on Monday morning.
The big move in short-term volatility is noteworthy. Typically volatility precedes price, which means that implied volatility would likely bottom several days before the price tops.
