Eerie calm signals S&P rally has staying power


NEW YORK: Beneath the adrenaline rush of November’s stock market surge is an eerie calm that points to more gains for equities investors, at least through the end of the year.

The S&P 500 Index posted an average daily move of 0.3% in either direction last week, its tamest swings in half a year, as the market lost some momentum towards the end of its second-best November since 1980.

The Cboe Volatility Index, also known as the VIX, fell towards the year’s lowest levels last Friday, and stocks rose after Federal Reserve (Fed) chair Jerome Powell gave his clearest signal yet that officials have finished raising interest rates.

“The market can work off overbought conditions by either declining price action or via time, and thus far, the S&P has digested the big advance by slowing down over time,” said Frank Cappelleri, founder of CappThesis LLC.

“The slowdown after such a strong first half of November should be considered constructive.”

To equity bulls, the price action shows that risk-on spirits haven’t generated the sort of euphoria that often precedes routs. And it demonstrates how reluctant investors are to cash out with the broad equities benchmark roughly 4% from a record high.

The S&P 500 Index climbed 0.8% last week, the slimmest gain in its five-week winning streak.

What happened? Simply put a flurry of big sessions in the first half of November gave way to a relatively quiet stretch, as the gauge went 11 days without a 1% move in either direction, the calmest end to a month since July.

If history is any guide, December is unlikely to bring heavy selling. Since 1950, it’s the third-best month of the year for the S&P 500, averaging a 1.4% gain, data compiled by The Stock Trader’s Almanac showed.

Portfolio managers’ tendency to boost their funds’ standing towards the end of the year by buying outperforming stocks helps drive this seasonality. Stocks also typically have a strong run in the period spanning December’s last five sessions and the start of the new year.

Still, there are plenty of risks on the table right now. Markets are positioned for a soft landing in the economy, but there’s no guarantee that growth will remain resilient after the Fed’s tightening takes full effect.

In one ominous sign, a measure of US factory activity shrank for a 13th straight month in November.

Another concern is that the bulk of this year’s gains have been driven by a sliver of the market. It’s the narrowest group of drivers ever for a rally exceeding 15%, data compiled by Societe Generale showed.

A favoured measure of momentum is also flashing a warning sign: The benchmark’s 14-day relative strength index jumped from beaten-down levels to overbought in less than a month.

That’s partly why Brian Frank, portfolio manager of the Frank Value Fund, is wary of the market’s advance.

“US stocks went from massively oversold to massively overbought in such a short period,” he said. “So November’s strong run could end up stealing some of December’s historic strength.”

In response, Frank is buying shares of small and mid-cap staples companies that are known for their dividends.

However, bulls are getting reassuring signs from corporate executives, who bought more of their firms’ shares in November, pushing the ratio of buyers to sellers to the highest level in six months, data compiled by the Washington Service showed.

The options market also is giving off a sense of confidence. The VIX futures curve, a tool often used as a guide for speculative positioning in the months ahead, showed a lack of crash-protection demand.

It’s now lower than it was at the start of November in a slew of maturities.

While there may be minimal suspense around the Fed’s Dec 13 policy decision, where the central bank is widely expected to hold rates steady, there’s still potential for turbulence from the economic projections it releases that day and Powell’s press conference.

Last Friday, the Fed chairman brushed off bets on rate cuts by mid-2024, but bond traders only doubled down on wagers that the Fed will ease next year. — Bloomberg

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