Minor Divergences Developing
We retain our bullish outlook on U.S. stocks from an intermediate-to-longer term perspective. A technical target well into the mid-3,000s for SPX can be expected during 2020. However, on a short-term basis, there are number of divergences developing that suggest a minor correction (2-3%) or a sideways trading range market environment may soon develop for U.S. stocks. This consolidation phase is technically constructive as this would help to alleviate an overbought condition setting the stage for the next sustainable U.S. stock market rally. Nonetheless, we strongly recommend investors and traders monitor the following technical developments for clues as to the start of the next minor correction in U.S. stocks.
S&P 500 Implied Volatility Index (VIX) – VIX Index (12.42) has declined sharply over the past month. It is now challenging its late-2018 and 2019 pivotal lows at 10.17-11.42. Implied volatility has basically fallen to a crucial level. The ability to find support here coupled with an oversold condition may trigger a sharp rally to key resistance at 16-18. Will a short-term rise in VIX lead to a minor correction in SPX (2-3%)? It is interesting to note the spread (21.90) between the top and bottom of its Bollinger Bands has contracted sharply in recent weeks. Although there is a possibility for further contraction to retest its late-Nov 2019 low of 10.97 this extreme compression in the Bollinger Bands is not sustainable. This hints of a potentially volatile move in VIX over the near-term.
10-year U.S. Treasury Yields (TNX) – Despite the recent strong SPX rally over the past few weeks a negative divergence has developed between stocks (SPX) and yields (TNX). That is, U.S. interest rates have been declining when the SPX have been rising. A short-term rising wedge pattern has also quietly appeared on the daily charts. A convincing breakdown below 1.67-1.75% hints of a retest of the recent Sep/Oct 2019 reaction lows at 1.43-1.51%. Would this action trigger a minor SPX correction?
US Dollar Index (USD) – USD appears headed toward an inflection point, at least from a near-term basis. USD has been rising in recent weeks while the SPX Index has trended higher. A higher-low pattern has also developed on the daily charts. A convincing move above key initial resistance at 97.38-97.44 (50-day/200-day ma) and above secondary resistance at 98-98.5 (Oct 2019 downtrend and late-Nov 2019 highs) confirm the start of a sustainable medium-term rally in USD. Historically, a rising USD warns of geopolitical/macro uncertainties and/or global risk aversion.