At a quick glance, it appears the market hasn't made any progress since it began struggling some nine weeks ago.
The S&P 500 closed on Feb. 5 at 2,648; it finished Tuesday at 2,656, a quarter-percent change in 44 trading sessions. The 10-year Treasury yield ended at 2.8 percent on Feb. 5 and sits right there now. The U.S. dollar index likewise is almost exactly in the same spot as on that first Monday in February — just a week and a half after stocks peaked.
Yet in the intervening weeks, stocks have been gyrating wildly and have featured near-constant quicksilver rallies and sell-offs that reflect indecision and extreme sensitivity to policy and economic news.
The S&P 500 has moved at least 1 percent on nine of the past 12 trading days, an unusual clustering of jumpy action. Partly as a result, the Cboe volatility index (VIX) has remained elevated above 20 for the past 14 days — also an uncommon stretch of heightened agitation outside of a full-blown bear market.
While this might appear a treacherously unstable action, it can just as easily be read as a messy base-building process, taking place a bit above the lows of the correction set on Feb. 9.
The eminent technical analyst Walter Deemer, who gained a wide following at Merrill Lynch, Putnam Investments and his own firm starting in the 1960s, said on Twitter, "A market that swings violently in both directions without making any net progress is usually a sign of a reversal rather than a consolidation." By this, he says he means a potential reversal higher following this two-month tailspin.
This emotional saw-toothed action has done some good by skimming away excessive investor optimism, compressing equity valuation and driving professional-investor positioning from heedless aggression to chastened caution. And that's progress of a sort for a market undergoing a correction from overheated levels.
Here's an array of investor-sentiment measures of bullishness and how they've turned much more subdued since Feb. 5. Remember, the broad market itself is at the same level as it was then:
- The American Association of Individual Investors: from 45 percent to 32 percent.
- Daily Sentiment Index of futures traders on S&P 500: 61 percent to 26 percent.
- Investors Intelligence investment advisors: 66 percent to 48 percent.
- Ned Davis Research Crowd Sentiment: 76 percent to 57 percent.
Meantime, firms that track the positioning of hedge funds are reporting that equity funds have halved their percentage exposure to stocks since the start of the year.
All this might not amount to a truly washed-out, hated market. But it surely shows a lot of hot money has either gone up in smoke or has cooled off, making the market somewhat less vulnerable to a quick shock.
Canaccord Genuity strategist Tony Dwyer, who called for a rough patch before the downturn began, says, "The two-month intermediate-term correction has been driven by correcting a historical level of optimism rather than a significant change in our positive fundamental thesis."
One indication this hasn't been mainly a fundamentally based market adjustment: The popular explanation for the weakness "keeps changing."
First, it was said to be all about wage inflation and rising bond yields, then it was a blowup in "short volatility funds," followed by trade-policy tensions and the threat of Big Tech regulation.
Further support for the idea that fundamentals aren't eroding significantly is the generally firm behavior of credit markets. While short-term funding costs are rising and financial conditions tightening from very loose levels, corporate-credit spreads suggest no serious economic weakness or financial contagion is stressing the system yet.
The damage below the surface of the stock market has been real, though. By the end of Monday, with the S&P 500 itself down, more than one-fifth of the stocks in the index were down at least 20 percent from their 52-week highs, while two-thirds were off more than 10 percent.
This is happening as aggregate earnings forecasts have continued to rise. The S&P 500's forward price-to-earnings ratio has slid from 18.6 on Jan. 26 to 17 on Feb. 5 to 16.2 entering this week — and 16.2 also happens to be exactly the five-year average multiple.
Again, stocks are not outright cheap, especially with liquidity and credit conditions likely having peaked for now and policy risks higher along several fronts (Fed, regulation, trade). But they are certainly reasonable, as profits appear poised to rise nicely in coming quarters.
It's probably telling that the market has been in this box consumed by tech-regulation fears and volatility-trading fund implosions and trade anxieties in the two months between earnings seasons.
The earnings season about to start is the relatively rare reporting period where good numbers might actually be a straightforward catalyst for a plurality/majority of stocks. Typically in the past couple years, markets would rise into earnings and then we'd get lots of churn and sell-the-news responses.
Perhaps it's understandable that traders seem eager to set aside the always-overblown trade-war concerns to refocus on corporate results.
On the flip side, if better-than-expected earnings can't lift a market that looks cheaper after nine weeks of struggle, it could be a tell that the market is in the grip of something a bit more serious than a curtailment of over-extended optimism and valuation, after all.