The S&P 500 Hits a 50-Year Old Complacency Milestone
- The 0.68 percent slide from the S&P 500 Monday was the biggest drop in months, but doesn't break the deep sense of complacency
- Monday's close would neither break the aggressive trend channel of the past month much less turned more systemic one-direction cues
- As high as SPX is and quiet as VIX has grown, the milestone of 113 trading days without a 1% drop (a 52 year record) is troubling
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Why the S&P 500 Matters to You
I reference the S&P 500 in virtually all of my analysis, because it speaks to the state of the global financial markets. There is little disputing that the United States represents the largest economy and market in the world. Beyond that, however, equities also happen to be the most popular asset class amongst global investors due to decades of favorable regulation and marketing. Furthermore, derivatives based on otherwise untradeable indices are the most liquid for this particular benchmark. And, given the current drive to record highs upon 9 consecutive quarters of advance, the attention and influence amid an increasingly complacent and illiquid system only concentrates.
We already know the state of the S&P 500 to be extreme - or at least we should. Even if you are a dyed-in-the-wool bull, you have to question the heights and persistence of such a market against otherwise questionable fundamental backdrop. Not only have we seen that incredible stretch of quarterly and monthly advance, we have also overshot the previous record high by over 80 percent. Further, we have seen 63 record high closes since the beginning of 2017. This is similar in nature to the VIX's plummet to the 9-10 level that was so frequent this past year. Further, from the US equity index, we still have the longest run without a five percent correction on record. What is more remarkable to me however is that we haven't had a 1 percent or greater decline for the SPX in 113 consecutive trading days. That is a very low milestone to surpass and yet it hasn't been matched for duration since 1966.
The Fist - and Next - Steps Towards a Turn
Up until this past session, the pace setting US equity index had not seen a 0.6 percent retreat through the close in just shy of 100 trading days - a record trend that was finally brought to a close. That is a first step. An aggressive speculator or full-blown bear could register this development as the first step to a broader and more convincing reversal. Yet, there is little use in trying to move too aggressively on calling the end of a trend that is arguably the most pervasive we have seen in the modern financial era. A break of the past month's aggressive bull trend, a more significant correction from record highs or more comprehensive change in bearing across global assets can offer a more convincing and probabilistic turn.
Catalysts and Implications
One of the most frequent questions asked of me when it comes to the big-picture tide changes in sentiment is: what can possibly be the catalyst to such a systemic reversal? If we look back to the 2000 or 2008 reversals in 'risk' the trigger was seemingly-innocuous at the time. Accounting issues and specialized housing derivatives barely registered before the fire started, and in the grand scheme they were not indicative of the true problem. The conditions that surrounding and facilitated these issues was the truly disruptive force. And, we have that today. Whether it is monetary policy, protectionism or a more traditional economic cue; we will look back and judge speculation as rampant and needing a natural course correction. We discuss the S&P 500's status and extremes in today's Quick Take Video.
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