The weekend video highlighted reasons to be cautious this week with 88% of S&P500 stocks above their 50d movikng average and 96% of S&P500 stocks trading above their respective 200d moving average. That said, April is one of the strongest months of the year, while 12 of our indicators were bullish, 3 were neutral and 5 were bearish to start the week,
In a recent letter to JPM clients that hit my INBOX this week, JPM Morgan analyst Andrew Tyler wrote, “while the “bull case remains intact” he also warned, “keep an eye” on growing divergence in the, “VIX, while expecting a robust earnings season. He noted recent conversations with clients that are increasingly worried about potential market pullback in May/June” and urges his readers to recall that last week none other than JPM’s resident in house Marko Kolanovic recommended staying long risk but adding hedges.
VIX relative to VXV is in the red zone. This respects VIX is short-term oversold relative to VXV, the three-month volatility index. In other words, while short-term conditions are reflecting increasing bullish activity, VXV projects a higher probability of volatiltity increasing 3 months from now.
We aer hedging with SPY puts while this “insurance” is still relatively inexpensive.
Click to enlarge chart.
S&P500 in 2009 was the last time 96% of stocks were above their 200d moving average. The index continued higher for another 6 months.
Breadth is bullish as well, though most stocks appear to be consolidating recent gains. Both value (XLB, XLF, XLI) and growth stocks (XLK< SMH) are at highs. All sectors have been performing as earnings season gets into high gear over the next few weeks. Results and guidance aer expected to be better than expected.
Click to enlarge chart.
The S&P500 “Equal Weight” index remains in a steep, bullish trend, gaining over 25% from the late October 2020 reversal. This index removes the weight of (7) big-cap tech stocks that would otherwise comprise 23% of the weighting in the big-cap index.
Note the middle panel shows 96% of stocks aer above their respective 200d moving average. The last time we saw that was late 2009.
We are hedging our portfolio modestly with puts while remaining 45% long equities, with US domestic and international exposure via IVV, TRBCX and VWILX. We also have 45% exposure to fixed assets and 10% cash (including alternative investments).