At the end of last week, stocks looked a tiny bit tired. Two days later and 2% lower, it’s getting ripe for at least a bounce. Over the past week, the inverse volatility ETF (XIV), which is really just the S&P 500 times 5 or 6 is down a whopping 34%! That’s some odd behavior and historically does not portend more significant downside.
Stocks are pulling back as they approached all-time highs which is certainly not unexpected. There are few indications that this is anything more than a dip to buy. Yes, I know the Fed is meeting right now. They won’t raise rate. Yes, I know that global rates are going more negative with the German 10 year Bund now below 0%. It’s a fear trade. Yes, I know that the UK has a vote to leave to Euro on June 23. Watch how the markets trade into the vote and after the vote, not what the vote actually is.
While the world turns dramatically bearish, keep in mind that the NYSE Advance/Decline line which measures participation is but a four days removed from an all-time high. High yield (junk) bonds, perhaps my favorite canary in the coal mine, are just two days removed from 2016 highs. Semiconductors have been leading which is a very positive intermediate-term sign although the other key sectors, banks, discretionary and transports are treading water.
All in all, I am a buyer into weakness until proven otherwise, the same tactic I have discussed since the February bottom. Keep a close eye on the sterling and euro ahead of the June 23 vote.
If you would like to be notified by email when a new post is made here, please sign up HERE
