Santa looks to be a reindeer or two short to deliver Dow 20,000 by Christmas. Mostly because we made the approach to the milestone after using up plenty of energy over the prior six weeks, the is easing back and the has demurred again near its all-time high above 2270. Breadth is weak, with two-thirds of volume to the downside and the "average" S&P 500 stock down about half a percent. Still no profound rush for the exits, just not much impetus to do much forceful buying after the market and hurried fund inflows got investors' equity exposures up pretty high.
Here's what I'm watching heading into the closing bell:
The mixed economic data was pretty much right on trend, which is to say: slow-and-steady in general, with alternating quick and slow patches. Maybe the personal income/spending softness is coloring the sentiment in retail and auto stocks today, which are getting hit pretty hard. If nothing else, it was a reminder of the world we live in, rather than the one the market has been trying to price in over the past six or seven weeks: A 2 percent economy, give or take, positive but uneven wage gains, a healthy but very mature auto cycle, businesses in no hurry to throw cash at capital investments and consumers prone to wide mood swings.
I've likened this phase of the rally to what we saw in August: The indexes flatten out after a powerful rally that caught the big money leaning the wrong way. The chart gurus insist, "The trend is up, leadership looks good, the rally is broad and well-supported, the low VIX just reflects a calm market, the market just needs to digest the gains." It was true then and seems true now. But as the sidewinding digestion occurs, tape grows just a bit ragged, investors start to pick apart all the economic data releases and patience wears thin. Back then, we eventually got a slightly more meaty 3 percent-plus pullback into September, which reloaded the tank with trader anxiety and invited in price-disciplined buyers.
It can't be lost on the investor hive mind that we had to absorb pronounced economic slowdowns over the past three winters, with ugly GDP prints for each first quarter. Not saying it's a sure thing to repeat, but this trend of positive economic surprises has helped spin the "cyclical reacceleration" story, and as this chart shows, the upside surprises tend not to hold these levels for long, as forecasts catch up and data trends revert to the mean:
All this helps explain the stasis in stocks: Indexes working off overbought conditions, data flow moderating, investor sentiment already pretty optimistic, memories of three straight January setbacks intruding on traders' minds. The broader health check still looks decent, though. High-yield bonds retain a stout bid, so credit conditions are favorable. There is room for the indexes to settle back before the latest uptrend is in jeopardy. S&P 500 earnings forecasts for Q1 are holding up fine.
Another angle on the purportedly "low" volatility index. First off, at 11.5 or so it sits at a substantial premium to the recent actual – or "realized" - volatility of the S&P 500, and that's a key input in where VIX is priced. And the divergences among stocks within the index have reached their widest levels since 2007. This has the effect of offsetting currents, dampening index-level volatility and suppressing the VIX. So, yes, VIX doesn't usually go much below 11, but it can still bleed lower or knock around here for a while without raising loud alarms: