In January, I published a research note that laid out four items I viewed as necessary for a stock market recovery.
The latest rally in the S&P 500, Nasdaq, and other broad stock market indices has investors feeling better. But an underlying pessimism persists, perhaps healthy (contrarian).
Is the market constructing a durable bottom? Or is this a house of cards ready to collapse.
Below is an update on the four items that need to improve. Here’s where we are at now:
1. Corporate credit market re-opening
It did. Total January issuance at $144 billion, right where it needed to be to show that companies can tap debt for buybacks and M&A. The latter took full advantage of it with about $100 billion of cash deals. Risk spreads followed the happy mood with Investment Grade tightening 27bps and High Yield a whopping 114bps.
2. Steepening of the 2-10 Yield Curve
Baby steps in the right direction. The 2-10 curve began the month at +15bps and ended at +18bps. Not much but better than nothing. To repeat, since the early ‘90s the steepness of the curve has not mattered. What is vital is that it not invert. The spread should be viewed as the available “margin of error”, and, on the margins, as a prop for risk appetites.
3. Re-steepening of the 3-month VIX curve
Step in the right direction. Since January 8 the 3m VIX curve has spent most of its time in positive territory, but without a whole lot of conviction. The September – December market drop did more than just passing damage to the bulls’ psyche, and despite the V-Shape move recovery, they continue to keep a foot across the exit door.
4. Repair of technical damage
Major improvement. The weekly DeMark counts/levels for the SPY are now outright bullish, with Bar 4 of a TD Sell Setup and a TD Propulsion Exhaustion Up target of $290.22. The monthly chart still has work to do to get back in full shape, but price is approaching levels which, if held, would flip the tone to positive.
Twitter: @FZucchi
The author has a position in the S&P 500 (SPY) at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
