It is hard to believe the last time the Dow Jones Industrial Average closed lower for 2 consecutive days was in January. Volume was higher across the board as the S&P 500 and NASDAQ marked a day of distribution. Volatility remains tame with the VIX still sporting an 11 handle. Investors simply do not anticipate any future volatility with this market. Even current volatility as measured by the Average True Range is still near multi-year lows. Despite the lack of volatility and fear there is an index flashing a warning signal. This market has been on a tear since the election and, quite frankly Brexit. These two huge political events were set to destroy the market. Only the opposite happened. If this current rally does not sell you on the power of following price than it is difficult to think what will. While those who continue to deny the power of price we will continue to bask in the success we have seen.
What index is having the most difficulty out of the major indexes? Sure, the Dow finally began a new losing streak for the first time since January. However, it is not the index we are seeing warning signs from. The Russell 2000 index is having a tough time as of late and is in danger of losing its January and February lows. We have yet to hit a series of lower lows and lower highs, but given the recent price reaction the odds of it happening increase. A big bounce with tremendous volume in IWM would go a long way. For now, the index has not been able to keep pace with the NASDAQ Composite, NASDAQ 100, S&P 500, and the Dow Jones Industrial average. Keep an eye on this index as we head into the Jobs report and into the Federal Reserve meeting next week.
Speaking of laggards, the energy sector has had a tough start to this week. Not only has the sector been roughed up this week a bit it is the ONLY S&P 500 sector negative on the year. Even Utilities are positive for the year despite the pending rate hikes by the Federal Reserve. Crude oil continues to move sideways, but lacks the necessary buying power to punch through to the upside.
There are some signs we are headed for a consolidation period. It is anyone’s guess what the market will do after the jobs report and after the Federal Reserve hikes rates by 25bps once again next week. Financials have been big winners since the Fed has hiked. It will be interesting to see if it continues or the upcoming events emerge as “sell the news” events.
To mitigate this risk, we have a robust risk management process using exits and position sizes. If this market turns south, we have our backside protected. Otherwise, we continue to ride the wave higher!