What you see on the tape today is a benchmark flat, but the majority of companies are higher, headed by cyclical categories (energy, industrials, and financials), and large-cap growth has pushed the S&P 500 down, resulting in a lackluster start.
This could very well be a trip by the S&P 500 to the top of its six- to seven-week range in a maturing bull market digesting a massive move. I’m not sure this qualifies as the most likely outcome, but it’s certainly a possibility.
On roughly one-third of all trading days since mid-April, the S&P 500 has either crossed or hovered just above 4,200. The low this morning was 4,199.88. Tell me if traders and trading machines believe that level is important.
Even since April 16, when the S&P began to flatten out, the “typical stock” has outperformed. Positive overall. More stocks are rising than falling, resulting in the same conclusion. There are no free passes here, but the evidence is skewed slightly in favor of the bulls.
This sideways phase coincided with a run of phenomenal upside earnings surprises, which helped boost the 2021 consensus for S&P 500 profits to nearly $200 per share, up from $180-ish a few months ago. This has resulted in a price-earnings ratio that is very typical of the “year two” of a profit/market cycle. How low can the P/E ratio go, given the super-easy financial conditions but the looming threat of stickier inflationary trends? That is the big macro decision to be made.
The market’s leadership profile has been indecisive from day to day, frustrating tactical traders – which has helped to moderate sentiment (unusual high “neutral” responses in surveys) and flatten hedge fund positioning. Pure reopening stocks peaked in March, so it’s unclear how much remains, but global reflation/reopening proxies (industrials, energy, and foreign markets) are firmer.
The rebound in hypergrowth/pre-profit/ARK stocks appears to have reached a “show me” point. Double-digit percentage gains in the last few weeks, but still in downtrends and 25-30% off February highs.
The wildness of meme stocks has decisively resumed, and the broader tape does not like it. There is no solid causal statistical link, but it appears that when the AMC/GME/BB cluster is hopping, the overall market loses a little steam.
The AMC serial capital raise and social media stampede are generating an intriguing dynamic. We now have a company with a market cap three times that of its peak pre-Covid peak and twice that of its peak pre-pandemic enterprise value (including all the debt). The bull case appears to be that it will pay its back rent (hooray), reduce its debt, and roll up other distressed theaters in the hopes of maybe, just maybe, riding a movie release rebound back to some level that is still below peak attendance from a few years ago, when its stock market value was one-third of what it is today. The most recent equity issuance went to a hedge fund, which likely holds the debt and was reportedly free to sell the stock right away. The stock’s option volume is at an all-time high. It’s entertaining to watch but dangerous to play.
Despite minor benchmark gains, market breadth is quite strong today. The VIX has risen back to 18 – part of this is likely due to a mechanical post-holiday weekend rebuild of options premium, and part of it is likely due to the meme stock options frenzy filtering into broader hedging costs as dealers try to position for the swings.