The S&P 500 and the VIX are approaching key thresholds, which could test the market’s mood
This is the daily notebook of Mike Santoli, CNBC’s chief markets commentator, with insights on trends, stocks, and market stats. CPI report as expected with softness at its core endorses the market’s recent risk-off migration, and relief increases as the Fed finishes tightening and refuses to rule out the chance of an economic soft landing. In general, the result for stocks is indecision near the anchor point of the S&P 500 – the 200-day moving average and the downtrend line from the January 2022 peak. In the very short term (such as a five-day rate of change measure), the S has been &P as of Wednesday’s close is expanding slightly. However, this is not as much as, say, the middle of August before that bearish reversal. The index is back to where it was four weeks ago (and flat with a low in early May, which came before the last 350 basis points of Fed tightening). I said this week that the burden of proof shifts to investors who insist that inflation will be held steady at high levels, and the outright drop in essential services month-on-month (ex-rent measures) reinforces that thought. Who knows where inflation will eventually settle, but there is bearish momentum at the moment. The entire bond market has moved on from the story of inflation with the volatility of long-term yields. The Fed is now seen making one last hike, two or even three small hikes, but then will likely pause soon to see the lagging effects on employment, financial conditions and consumer prices. There is a good discussion now about the relationship between inflation and the labor market. Inflation has come off the boil with hiring not abating much at all (claims remain low, unemployment rate at 3.5%, job openings and layoffs cooler but still strong against history). In the 1990s, the Fed believed that unemployment anywhere below 5% to 6% would cause inflation to accelerate, but this has been proven wrong. – In 2010, the Fed was unable to raise inflation to its 2% target even as unemployment broke to historic lows – In other words, maybe the Fed decides the relationship between jobs and inflation isn’t as consistent or as accurate as it recently suggested, so the central bank doesn’t need To seek a material weakening of the labor market to bring inflation back to acceptable levels? Several separate themes are energizing stock movement early this year: Consumer cyclicals welcome low rates/strong income growth for the time being; Fixed Asset Plays and CAPEX / Reopen China (Manufactures and Materials) works; Big tech got a reprieve from the brutal divestitures late last year and reduced pressure from bond yields. The former speculative tech in the boom period is now well past its two-year peak, and many stocks have been crashing along their lows for a while. Some bases may form in the lucky ones, but don’t expect this group to return to glory. If things go sour here, that’s not a good sign for sentiment and the Fed’s reaction dynamics, but we’re a long way from there. More broadly: – Sentiments are warming from extremely pessimistic levels. Volatility is draining from both stocks and bonds as the index is stable, most of the key data is done and earnings season brings more action in name versus overall focus and the Fed meeting about three weeks later. –Earnings forecasts look beatable last quarter after big cuts to forecasts, though guidance could put pressure on forward estimates. Credit markets are very supportive at the moment. Throughout 2022, it was smart to sell on rallies in the S&P at or above the 200-day average and when the VIX dips to or below 20. Both conditions are here or close. This is a good test to see if the nature of the market can change. Very few people seem to think that the rally from the October low is the “real thing,” which is a net positive. Market breadth is again positive and remains one of the strongest features of the recent days’ moves – we are starting to see a nice excess of fresh 52-week highs above the lows, suggesting steady demand for stocks. Some of this stems from the delay in 2022 getting a mechanical break. So far, we haven’t seen an impressive “rush of momentum” yet – and a decisive move above obvious resistance levels remains. It is moderately constructive nonetheless.