EC As Good As It Gets: Will Q2 Mark Peak Reporting?

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As we discussed last week, the market not only got off the mat but rallied back to new highs. That action continued through this week.

The technical backdrop is not great. With the market back to 2-standard deviations above the 50-dma, conviction weak, and investors extremely bullish, the market remains set up for additional weakness.

However, we are in the first two weeks of July which tends to be bullishly biased. After increasing our equity exposure previously, we will give the market the benefit of seasonality for now. 

Complacency Concerns

With the “money flow buy signal” not yet back to a typical peak, such suggests another week or so of upside is likely. However, as noted, we suspect there is not much upside in the market for current levels.

Lastly, we discussed the high level of complacency in the markets previously. To wit:

“Currently, complacency has reached more extreme levels. As noted last week, the 15-day moving average of VIX, on an inverted scale, suggests a correction is likely. By this measure, the correction should begin somewhere around July 21st – August 10th.”

The same gets confirmed by the exceptionally high reading of the SKEW index. 

“One such indicator is the CBOE SKEW index. The index measures the perceived tail risk of the distribution of S&P 500 investment returns over a 30-day horizon. It is similar to the VIX index, but instead of measuring implied volatility based on a normal distribution, it measures the implied risk of future returns realizing outlier behavior.

A SKEW value of 100 indicates the options market perceives a low risk of outlier returns. Conversely,values above 100 reflect an increased perception of risk for future outlier events.” 

We are clearly above 100 currently.

Warnings, Technically Speaking: Warnings From Behind The Curtain

The bulls are indeed in charge of the markets currently, but the clock is ticking.

As Good As It Gets

There is much at risk in the market as we head into the 3rd quarter and begin Q2-reporting for the S&P 500 index. For clarity, we need to review the “second-derivative” effect.

“In calculus, the second derivative, or the second-order derivative, of a function f is the derivative of the derivative of f.” – Wikipedia

In English, the “second derivative” measures how the rate of change of a quantity is itself changing.

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William K. 2 months ago Member's comment

Once again, the problem with profit taking at a peak is the lack of buyers wanting to buy at "peak" prices. The bad news there is that to sell requires a buyer willing and able to buy. That is just how it works. And of course that old axium still applies in the markets as much as in more traditional gambling: Do not bet more than you can afford to lose. That is the way to avoid disasters, but it does not help in avoiding the pain.