S&P 500: More of the same

By Colin Twiggs
February 17, 2017 1:00 a.m. EST (5:00 p.m. AEDT)

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Volatility for the S&P 500, as measured by the VIX, retreated below 20, suggesting that the worst has passed.

S&P 500 Volatility (VIX)

Corporate bond spreads (Lowest investment grade Baa minus 10-year Treasury yield) reflect no rise in lending risk premiums.

Corporate Bond Spread (Baa minus 10-Year Treasury Yield)

The composite Financial Stress Index from St Louis Fed shows a slight increase in financial stress levels but remains below -1.0, indicative of a bull market.

St Louis Fed Financial Stress Index

According to Standard & Poors, 248 of component stocks in the S&P 500 have reported earnings for the December quarter, with 191 beating estimates and only 34 misses. Their revised estimate for the index of $33.47 operating earnings per share is an increase of 20% over the preceding December quarter and an 18.5% increase over the highest previous December quarter (2013).

Logically, the S&P 500 should recover in the next week or so and continue its multi-year advance. But the market is governed by emotion in the short- to medium-term, not logic.

Short daily, overapping candles reflect a measure of caution. Investors are now more wary than they were in January. The S&P is likely to recover, but expect another test of support at 2550/2600 first. Respect of support would bolster confidence and encourage buyers to return. Breach of support is unlikely but would cause another spike in volatility.

S&P 500 Twiggs Volatility (21-Day)

Twiggs Volatility (21-day), reflecting the medium-term outlook, remains elevated. Retreat below 1% would indicate that bullish conditions have resumed, while respect of 1% would warn that risk remains elevated.

The intelligent investor is a realist who sells to optimists and buys from pessimists.

~ Benjamin Graham


Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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