Markets have made their way back from a dismal month of August to put themselves near all-time highs. If it seems like a familiar tune, well it is. Seeing the chart below, the S&P 500 was surging in July toward all-time highs, then a series of tweets hit along with some poorly received news from China, and the meltdown occurred. Are we going to face a similar fate, or will we dodge the danger?
One thing we know is markets are reacting on news, tweets, promises and even some fake news. That makes for a tough trading environment at a time when fundamental data is coming in mixed. Manufacturing and industrial are struggling mightily, while energy is languishing. Banks have recently had a nice run but there are challenges here with the economy on the lower end of forecasts.
The recent run for the markets was achieved mostly during the overnight sessions, with big gap moves up (and a few down) giving few a chance to get a leg up. In about a month the market indices are higher by about 6% - but is that it? The indicators are certainly improved since the middle of August, but that was also the case in late July. RSI is steep and rising while MACD is on a strong buy signal and not overbought, the cloud has just twisted green. Volatility was low back then as it is now, showing heavy complacency.
Speaking of complacency, take a look at the late April/early May period too, a time when markets were at all time highs, too. The VIX was sporting a very low reading, around 12 or so (not much lower than the current reading), and a few sharp moves up in volatility and the markets were pounded - down 9% or so in a month.
Use caution here, as the positive news flow may start to thin out. We have a Fed meeting this week, where good news may already be baked into stock prices. A rough tweet or sour tone by the Chinese could mean another retreat from these highs. Further, sentiment is quite bullish too, complacency is high. There is NOTHING wrong with keeping on some protection, while it may sting at times it is the right thing to do.