Stocks could autopilot to more new highs

Stocks started off on a soft note Tuesday, but the market seems set on autopilot toward more new highs.

Sloppy trading in the dollar early Tuesday after San Francisco Fed President John Williams said the Fed should consider raising inflation targets also weighed on stock futures. Commodities however, were mostly higher. New York Fed President William Dudley was later quoted as saying the Fed could still hike rates in September, and that took the dollar off its lows.

"It's hard to fight the Fed, and I just think the Fed's hands are still tied and that's why the market is doing what it's doing. … The quest for yield continues. My gut tells me that it doesn't look right, but at the same time it's hard to fight it," said Daniel Deming, money manager with KKM Financial. "I'm maintaining some defensive positions. It makes it seem like the market does want to chug higher unless the Fed does move."

Stocks rose to record highs once more Monday, as the Nasdaq 100 finally joined the Nasdaq comp, S&P 500 and Dow in record territory. The Nasdaq comp, S&P 500 and Dow all reached record highs together on Thursday. The S&P 500 rose 6 points Monday to 2,190, and now traders are watching the big round 2,200 level.

Cockpit, autopilot
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Stocks were helped by oil, which rose nearly 3 percent on more talk about a producer meeting and new data that shows a drawdown in U.S. inventories. West Texas Intermediate crude was at $45.74 per barrel Monday, above the key psychological level of $45 and just four cents below its 50-day moving average.

"I think we're extended here. I think we're due for a pullback, but as long as interest rates stay where they are, stocks aren't going to go down a lot," said Steve Massocca, managing director at Wedbush. "We're 200 points off the June bottom. We had a 10 percent rally … It's a tinderbox right now. All it needs is a little spark."

Massocca said oil's gains were largely a short-covering rally, and he doesn't believe they will be sustained. As for stocks, they could drift higher until a catalyst comes along to break the momentum — including economic data.

But the simultaneous new highs in the three major stock indexes has a track record of being a positive event for the market, according to a study by Ryan Detrick, senior market strategist at LPL Financial. The last occurrence before Thursday was in 1999, right before the tech bubble burst, sending stocks sharply lower.

Detrick studied that and 147 other instances back to 1979, where the three indexes closed at new highs, and 75 percent of the time the market was higher a year later, for an average gain of 11.9 percent.

"There's one thing that stands out. It happens in clusters. For this to keep happening for the next couple of months is perfectly normal," he said. He noted that the most instances were in 1995, when there were 25 occasions and stocks had one of the strongest years ever, with the S&P up 34 percent.

But near term, there can be weakness. His study showed the average return one month later to be on average a decline of one-tenth of a percent, and the market was up just 52 percent of the time. Three months later, there was an average gain of 1.2 percent and the market was higher 63.5 percent of the time. Detrick said the fact that the market's breadth is much broader is a positive. "It's definitely a much more positive underpinning, as we're having a lot more participation in the rally," he said, pointing to the leadership of technology and health care.

As stocks have slowly moved to highs, the VIX, the CBOE's volatility index, has been trading at very low levels — signaling some that there is too much market complacency. The VIX closed up 2.3 percent Monday at 11.81.

Deming said there's been some interesting activity around the VIX call options, dated for late September when the Fed meets Sept. 20 and 21. He said 77,000 Sept. 25 VIX calls traded Monday, which had open interest of about 104,000. Open interest on the Sept. 21 calls was 232,000, and it was 195,000 for Sept. 22 VIX calls, he said.

"It definitely appears there's some positioning for the possibility of something happening," he said, adding there was very high volume in the late September options last week.

As for Tuesday's data, the consumer price index is expected to be unchanged, while core CPI, without food and energy, is seen rising by 0.2 percent. The CPI is released at 8:30 a.m. EDT, as are housing starts for July. Industrial production and capacity utilization is reported at 9:15 a.m.

Earnings were expected from Home Depot, BHP Billiton, Dick's Sporting Goods, TJX Companies, and Advance Auto Parts, before the bell. Urban Outfitters, Cree, Popeyes Louisiana Kitchen and 21Vianet report after the close.

There is also a 12:30 p.m. speech by Atlanta Fed President Dennis Lockhart in Knoxville, who appears before the Rotary Club of Knoxville, TN.