Q4 Insights: Bull market intact and still running
9 November 2017
By Rodney Raanan
Investors have been benefiting from a bull market rally, which is ready to enter it’s 9th year. However, history has shown that bull markets often don’t last this long, which has many asking if this current market rally is coming to an end. The financial crisis was a scary time for investors, with all asset classes becoming correlated and moving to the downside. Volatility was extremely high with panic setting in and investors rushing to buy protection. The Federal Reserve bailed out the markets by lowering rates to zero, while congress passed the Troubled Asset Relief Program (TARP) in an effort to stabilize the banks. Since the lows seen in March of 2009, the market has been steadily moving higher and making all-time highs nearly on a daily basis. Many thought the market would collapse once the Federal Reserve began to raise rates, but that has not transpired. Are we far enough removed from the crisis that investors have become complacent? Or are we in a healthy bull market with a strong trend, low volatility, and low yields?
The S&P 500’s trend is higher with all three moving averages sloping from the bottom left to the top right. All pullbacks in the S&P 500 should be a buying opportunity with key support levels sitting at 2,544 and 2,496. The 2,544 level was tested a few times and held strong with bulls regaining control and pushing the market higher. We will need a change in character with increased volatility, lower lows, and a breakdown in prices in order to start thinking about an end to the current bull market. Right now the bulls have positive economic activity, increased corporate profits, low yields, and tax reform working in their favor.
The Volatility Index
Low volatility is an indication of a healthy bull market. The volatility index or VIX has recently been trading below 10, indicating that we have small amounts of fear in the market. In the chart below, selling volatility has been very profitable as each spike in the VIX was short lived. When fear sets into the market the VIX jumps as investors rush to buy put options. In turn, implied volatility increases and put options become more expensive. If the bull market were to end we would see the VIX remain elevated for an extended period, signaling a change in sentiment. Currently, put options on the broader market are cheap, allowing investors who want to hedge an opportunity to do so rather inexpensively.
The 10-Year Yield
The 10-year yield is very much in focus. We had a double top of ~2.61% in Dec/Jan, held the 2% support level in September, and are now holding the 200-day moving average of 2.31%. For the bull market to end, we need to see a bond sell-off and a jump in yields. We don’t anticipate the market really panicking unless the 10-year yield gets above ~2.61%. In order for the yield to rise, we need bonds to be sold. Bonds usually lead stocks into a bear market.
The bull market may seem overdone, but it is important to keep in mind we are coming off an unprecedented stock market crash. The top in 2001 was marked by the technology bubble bursting and the top in 2008 was marked by the housing crisis. Bull markets don’t end until we see rapid expansion, which coincides with industrials, materials, and energy stocks making highs. Additionally, as we have pointed out above, we have a well-defined trend higher, historically low volatility, and low yields despite the Federal Reserve raising rates. In order for the market to begin to show weakness and for sentiment to shift, we need one of these factors (trend, volatility, or yields) to begin to reverse. Until that happens, I think all dips should be buying opportunities and we have a risk on environment.
* Data is of 11/8 market close.
Rodney Raanan is the Director of Capital Markets & Market Intelligence at Q4 Inc. Rodney works directly with C-level executives of publicly traded companies by providing real time money flows, stock activity updates, options analysis, and technical analysis. Rodney has over 10 years of capital markets experience as an equity trader and an analyst. Follow Rodney on Twitter and Linkedin.