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Stocks opened a bit lower with trade tariffs once again cited as the proximate cause for the modest selling. But, as they quickly rallied off the lows and are now near unchanged. Let’s face it, aside from some minor headline hiccups, the U.S. stock market has mostly ignored or discounted the prospect of a trade war — as the major indices have all hit, and sit near all-time highs over the past few weeks.
While overall market breadth remains extremely positive — thanks to a healthy rotation and interestingly it’s the tech sector that has been the laggard of late — it should be noted that it’s losing some momentum. The number of stocks above their 50 and 200 DMA remain below levels seen at previous market highs.
The S&P 500 has now extended its streak of days without a 1% move, up or down, to 52 days. Volatility has also contracted with the 20-day realized volatility of the S&P 500, down to 6.7%. The VIX is back near 52-week lows at 11%. But perhaps some of the trade tensions — and broader global weakness — is weighing in on some companies profitability. Heading into earnings season, we are getting the largest number of companies issuing negative EPS guidance in over 2 years.
Can this volatility grind continue, or does it show a sign of complacency that will give way to a significant market sell-off? The former has been the dominate trend for sometime now. But with tariffs starting to bite just as Q3 earnings get released, companies may ramp up warnings and lower guidance, causing investors to re-think current valuations. With the price of options back near 52-week lows, this may be a good time to buy some put portfolio protection.