It is often said that markets are never wrong. Maybe it’s a definitional issue as a market is only the sum of its participants and value is based on perception, but a look at any larger historical chart and it’s clear that markets can overstretch from their historical equilibrium by great distance only to then revert to some level of balance. These deviations can be driven by fear and panic on the downside or of course excessive optimism and euphoria on the upside. In this time of meager revenue and earnings growth yet record liquidity and financial engineering (such as stock buybacks) I present this monthly chart of the $SPX:
A few items to note: When markets disconnect widely from the middle monthly Bollinger bands it is usually a good time to be mindful that a sudden re-connect with said band is a high probability. Today’s market is as far disconnected to the upside from the middle monthly Bollinger Band as it has basically ever been. Two similar large upside deviations occurred during the 1998-2000 bubble, a smaller version occurred right before the financial crisis in 2007. All previous upside deviations have resulted in a reconnect. Hence the historical record is clear: This market will reconnect. History suggests that such a reversion move can occur rather quickly once it gets going, in fact, the reconnect seems to usually occur within 30-60 days of a peak having been reached.
As with the May message of the $VIX from yesterday, signs are accumulating that things may get a bit more volatile in the weeks to come. Or maybe it’s time to ignore history and just be pleasantly long. Your choice:
Categories: Daily Market Brief