Nope, I'm not referring to college basketball. Instead, it's this wacky stock market. In my last article, I discussed several reasons why the 2014 advance is on shaky ground. Since then, we've seen increased volatility and lots of whipsaw action. Earlier in March, our major indices pushed to fresh 2014 and/or all-time highs and briefly even suggested money was rotating back into more aggressive areas of the market. For instance, I had questioned the lack of leadership of banks ($BKX) just a couple weeks ago. Well, that changed in early March and banks improved their relative strength standing. Check this out:
Note however that while banks did begin to show strength again to open March, there was an obvious failure at price resistance just above the 71 level and banks have since been leading the push to the downside again. One of the keys to a sustainable S&P 500 advance, in my opinion, is a relatively strong financial sector, especially banking industry. Should the S&P 500 rally again and banks lead the rally, it would help to argue for higher prices near-term. Short of that, though, I'd be very careful given the current market backdrop.
The Volatility Index ($VIX) is sending a warning message of its own. Generally speaking as the S&P 500 rises, the VIX declines. Market rallies are normally quite boring with little volatility from intraday highs and lows. Nearly every significant S&P 500 rally has been accompanied by a downtrending VIX. Check out this long-term chart:
One common denominator at major market tops and bottoms the past 15 years is that the VIX has begun to change trend directions just prior to the directional change of the S&P 500. Think about it. We just broke out to an all-time high on the S&P 500. We should see the VIX moving to near-term lows, reflecting the market's bullish belief that the rally will continue and volatility will be minimal. But that's not the message the market is sending and we should take note.
Higher volatility can set up very big moves in riskier trading candidates and I'm featuring one as my Chart of the Day for Monday, March 17th. If you'd like to see this Chart, you can CLICK HERE.
Happy trading!
Tom Bowley
Chief Market Strategist
Invested Central
