Macro Technical Review: February 2018

YTD to the S&P 500 is up 1.5% but experienced an intra-month drawdown of 8.59% during February using closing prices. If we include top to bottom intra-day data to calculate the swing it was a 10.3% drawdown at the worst point. February worst month in over two years. We were coming into the month the most overbought since June of 1996, which subsequently was the last time we had an RSI reading over 87 on the monthly data. A similar drawdown happened in July 1996, so the reaction shouldn’t have been surprising. And, if I'm honest, it was welcoming to see volatility again. Below is the S&P 500 Index on a monthly basis. I have placed the 10-month and 20-month moving averages, fib levels, and RSI. You’ll notice we reached the 261.8% fib level in January setting us up for this correction, but the market bounced once it dipped below the 10-month moving average. Setting up March to be our confirmation month for higher, lower, or even sideways.

SPX 2-2018 Monthly with Fib.png

Much of this pay months volatility was because we were at market extremes on a technical basis. We also had a new Federal Reserve Chairman, Jerome Powell, takeover. And throughout history, the Mr. Market has been fond of testing new leader of the Fed Chairs. In recent past, Yellen, Bernanke, and Greenspan were all tested, but the history goes much deeper than that. Basically, I view this as hazing, and just like rush week in college, the joke is on the newbie. For more on this check out LPL’s Research.  

VIX 2-2018 50 break.png

The short-volatility trade also blew up when the VIX index spike over 50 for the first time since August 24th, 2015. Credit Suisse closed their short-volatility ETF (XIV), and Proshares short-volatility (SVXY) is down an astonishing -89.64%. Many traders and investors had been using these short-volatility ETF’s instead of the SPDR S&P 500 ETF (SPY). The low volatility environment the past few years created a perversion in the market where short-vol was being piled into like broad-based equity ETFs. I remember an article in the last couple of years recommending investors to switch from SPY to XIV for your equity allocation. The argument as always was more alpha, and it worked since the fall of 2016 until it started to crack one month ago. The chart below shows the gap the short-volatility ETF closed. Sadly, the retail investor never understood the product, or read the prospectus. If they did, they would have known it was a ticking time bomb.

SVXY Compared to SPY 2-2018.png

With that said, your sector leader was technology once again. With the Technology Select Sector SPDR Fund ETF (XLK) down a measly -0.49%. This is a great sign when leading sectors to continue to lead in weakness. The only concern is potential double top in the sector. We’ll want to see new all-time highs in the sector even if the broader market doesn’t make a new high.

XLK 2-2018 Daily Double Top.png

And, just for fun, look at agriculture commodities like wheat! The PowerShares DB Agriculture Fund ETF (DBA) was actually positive on the month up 0.89%.

DBA- 2-2018 15min Whole Month.png

In short, March is extremely important. Many market participants panicked during the volatility in February and who can blame them. The mind has been built for “fear of loss” mentality since the beginning of humanity. But as of now, I’m neutral, and the path of least resistance still favors the bulls until we break down further. To back this up, we also got some favorable fundamental data at the end of the month. S&P companies reported revenue growth of 8.2% in Q4 2017 according to Factset. That’s not bearish.  Also, earnings estimates for Q1 2018 has risen by 7.8% the past 12 months and 5.8% since December 31st. That’s not bearish either.

I like to call this view, cautiously optimistic. And, at worst I think we’ll consolidate sideways, which will contract P/E multiples and bring valuations down anyway. Of course, if we take out the lows, all bets are off this spring. But, who wants to be a pessimist? So, as we begin March and I stare at 4-feet of snow, please remember spring is a time of renewal!

*After a tough month for my family in February, I’m glad to be back writing. This month I’ll be producing more technical & fundamental outlooks on single stocks, macro market commentary, and even sharing some personal trials and tribulations my family experienced over February.