The equity markets began adjusting for higher interest rates early in January after the S&P 500 Index reached a new intraday high at 4818.62 on January 4. While it's yet to be determined how high or how quickly rates will rise, equities with high price-to-earnings [P/E] ratios, often referred to as having long duration, experience selling as money rotates into lower-priced alternatives. Additional details follow in the Market Review including WTI Crude Oil.

S&P 500 Index (SPX) 4348.87 declined 69.77 points or -1.58% last week after bouncing back to close above the important 200-day Moving Average on Tuesday and Wednesday before falling back below it on Thursday.

Technically, the highs made on February 2 at 4595.31, and February 9 at 4590.03,  define a small double top with a measuring objective down at 4305, a level that it will likely reach soon on the way to retest the January 24 low at 4222.62, unless macro sentiment quickly improves.

A recent Credit Suisse article adds to evidence of the rotation out of high P/E stocks by comparing the most and least expensive stocks using trailing price/earnings ratios. Since the start of the year companies with low P/E ratios gained .8% while the high P/E group declined 10.4%.

CBOE Volatility Index® (VIX) increased .39 points or +1.43% last week ending at 27.75. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added 1.15 points or +5.00% to end at 24.13%.

VIX Futures Premium

VIX futures premium ended last Friday at .54%, just inside the yellow caution zone with March futures now the front month, compared to February 11 at -.91% in the red bear zone.

The chart reflects the distance from the VIX to the futures curve computed from the two front-month contracts. Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications turned slightly lower last week wobbling on a downward sloping path. For the week, it ended down 33.84 points or -5.89%  to close at     -608.50 and as previously mentioned, still well below all of the recent troughs, with the exception of March 24, 2020, at -1256.95, during the Covid shutdown period.

Crude Oil Update

WTI Crude Oil (CL) 90.21 basis April futures declined 1.21 points or -1.34% last week while still well above the 50-day Moving Average at 80.80.

Backwardation reflects tight market conditions when near month futures prices also called prompt, exceed deferred prices. On Friday, April futures closed at 90.21 while April 23 futures ended at 78.18 backward by 12.03 or 13.34%. Comparable readings were backward by 9.43% on January 7, 2022, and by 5.64% on December 10, 2021, indicating a tighter market than at the start of the year.

As for inventory levels, the latest EIA report shows 411.5 million barrels as of February 11, compared to 410.4 million on February 4, up 1.1 million, but still well below the 5-year range and 461.8 million this time last year. See the following chart.

On the presumption current prices likely include some geopolitical concerns like a nuclear agreement with Iran and uncertainty about Ukraine watch the trendline.

From the perspective of the operative trendline that began on December 2, 2021, low at 61.84, then touched the December 20 low at 65.69, it currently crosses down at 82, just above the 50-day Moving Average at 80.80 and support from the previous October highs just below 80. While inventories remain below the 5-year range odds are it will hold above the trendline on any pullback.

Strategy

Watch this week as the S&P 500 Index retests the January 24 low at 4222.62. Failure to hold will mean more pain for the bulls, especially those still holding long-duration stocks, the growth ones with high P/E ratios. Other sectors like materials and energy could hold up better and benefit as money continues rotating out of growth stocks with high P/E ratios.

Seasoned traders and strategists follow the rule of unknowns by initially positioning their portfolio holdings for both up or down markets and then adjusting, and hedging until the direction becomes apparent.

One last thought about uncertainty, either about interest rates, the S&P 500 Index, crude oil, or geopolitical affairs.

"Those who have knowledge don't predict; those who do predict don't have knowledge." – Ian E. Wilson, former GE Chairman

Summary

The S&P 500 Index failed to hold above the important 200-day Moving Average last week reflecting continued selling of high P/E stocks although energy and materials sectors held up. Odds increased the S&P 500 Index will retest the January 24 low at 4222.62 this week. Crude oil remains in an uptrend due to low inventories but is subject to pulling back on geopolitical news.