Mid-Month Market Update: Not Rushing to Pass Judgment
By: Christopher Mistal
January 15, 2015
At the half-way point in January, the market is looking a bit shaky. Since their respective late-December highs, DJIA is down 4.1%, S&P 500 4.7%, NASDAQ 4.9% and Russell 2000 5.3% as of today’s close. This brings January’s decline so far to 2.8% for DJIA on up to 4.2% for Russell 2000 and these indices are now nearing their mid-December lows. All are currently trading below their 50-day moving averages (solid magenta line), but remain above their 200-day moving averages (solid red line) and projected monthly support (green dashed line). Stochastic, MACD and relative strength indicators are all negative and nearing oversold levels.

[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
[Russell 2000 Daily Bar Chart]

Concurrent with the market’s move lower, the CBOE Volatility Index (VIX) has climbed into the low twenties. As unsettling as this may seem, particularly considering where the VIX has been in recent years (and bull markets), it did spend much of the late-nineties at or above today’s level. It simply implies we should expect daily percentage moves to widen and occur more frequently. Spikes above 30 would be more concerning and indicative of elevated fear.

[VIX Monthly Bar Chart 1993-Present]

Bond yields have also plunged to either record lows or close to it in recent days. Moody’s AAA Corporate Rate was 3.54% last week, its lowest level since November 2012 and just above its lowest ever reading of 3.26 touched in July 2012. The 30-year Treasury bond yield appears to have reached a record low today at 2.4%. Low long-term rates have historically been a reliable harbinger of economic trouble ahead as they tended to proceed periods of low economic growth and/or inflation. 

From a global perspective, growth and deflation are a present day concern, but we do not need low rates to tell us that. Central banks around the globe have already said as much by lowering interest rates and/or announcing other stimulus measures. In fact, negative interest rates are now rather common outside of the U.S. So while our domestic data remains reasonably solid, our 10-year Treasury yield around 1.8% is rather attractive in Japan and Germany where their equivalent bonds yield less than 0.5%. Factor in a strengthening U.S. dollar and the yield difference only becomes even more attractive. Taking a longer-term view of U.S. interest rates and the stock market, falling rates over the last 33 years certainly have not hindered our stock market. S&P 500 climbed from 120 in 1981 when yields were above 15% to over 2000 today when rates are below 2%. This is a gain of nearly 1600%.

Don’t misinterpret this assessment of volatility and interest rates. I don’t expect the market to sprint immediately higher, but I also don’t expect it to completely unravel. Economic data has been mixed lately. For example, the Commerce Department reported retail sales declined 0.9% in December but the National Retail Federation said holiday sales were up 4.0% from 2013 levels. Cause for the disparity could be the fall in energy prices or the seasonal adjustment factor. Our very own January indicators also painted a mixed picture. There was no Santa Claus Rally this year, but the First Five Days did finish positive. 

The bottom line is there is a great deal of noise to contend with at present, but the trend on the charts is still positive, U.S. fundamental data is generally solid and seasonality is also positive. Until a clear breakdown in trend, indicators or data presents itself; our portfolios will remain long orientated. 

Today’s “surprise” move by the Swiss Central Bank (SCB), removing the currency peg it put in place over three years ago, is a good example of noise. Does the SCB really know something that the rest of the world’s central banks don’t? What’s the point of cancelling a peg that was pulling your currency lower and lowering interest rates at the same time? Why such a massive response by the rest of global markets? At #20 by GDP, Switzerland is not exactly an economic heavy hitter. They do have a reputation for stability, but honestly, this assumption should probably be reevaluated. Two large scale currency interventions in a little more than three years do not sound all that stable to me.