The resilience of the equity markets has been quite impressive. At the time of the February lows, pessimism was rampant. Faith in the Chinese economy was shaken, gold was on the rise and there were faint whispers of imminent recession. Fast forward six weeks and the S&P 500 has rallied 12 percent, the regional PMI reading surprised hugely to the upside and the VIX index (a measure of market volatility) has been cut in half. Throughout this seven year bull market we have experienced numerous pullbacks and subsequent rallies, but until now we haven’t seen such a colossal drop in volatility. The primary reason for the drop has been the average stock’s participation in the rally. This increase in market breadth is evident by viewing the 50-day moving average for any given stock. More than 90 percent of large cap equities are above their 50-day trend line. The proverbial rising tide has helped most stocks participate in the recent rally.
This week the financial markets’ rally was interrupted by news of another horrific terrorist attack - this time in Brussels. Historically, markets have used these shocks as an opportunity to pause and regroup, but the trend that was in place prior to the event in question usually continues.
Continuation of the current rally requires follow-through on higher-than-average volume. This is not a foregone conclusion. The last few trading days have been punctuated by sellers outnumbering buyers, hawkish comments from St. Louis Fed President Bullard regarding an April Fed hike and the U.S. markets closing early for Good Friday. At present, the market seems to be waiting for the March ISM index reading before making a move.
Our Takeaways for the Week:
- The market is looking to ISM for guidance on the direction of the economy … and consequently the stock market
- The current uptrend in the market is fragile and needs confirmation