Over the past month, as the SPX has transitioned trajectories from vertical to range-bound, I have become increasingly pragmatic as the path of least resistance for price, has also been working against the path of the greatest shifts in sentiment. Alas, a contrarian's trading range - and one that has provided another brick to the Wall of Worry and little collateral damage for the bears to chew on.
This pragmatism arose from the realization that the downside windows both came and closed throughout the first quarter, which have only emboldened the perspective of the Bears and rattled the resolve of the Bulls. This was borne out in the charts and sentiment surveys with shallow, yet powerfully exhausted corrections that have failed to find traction for more than a session or three. As mentioned in previous notes, these were the first indications to me that the market in the short term had more upside than downside risk and had successfully sidestepped the hazardous divergences that warranted concern over the first quarter.
And while I can more than appreciate the logic and structural underpinnings of the Bears thesis today, I fear that the argument has veered into more or less an academic debate when expressed through time and one that has less probability of traction in the near term and balance through the second quarter. Adaptation to price continues to trump dogma - especially in market environments where the visible hand of our monetary handlers continue to provide support to untimely pockets of illiquidity. I may even go as far as admitting that the central banks themselves have adapted their global coordination to a market environment that continues to provide ample opportunities to replenish the liquidity spirits anew.
As anticipated a few weeks back (see Here), the USD broke through support on the weekly charts last week. Considering the structure of what was support and the stochastic presentment of momentum, a continuation of the downtrend is likely this week.
In the past I have utilized the relative performance of the banks, contrasted with the broader market - to support the idea that the banks have failed to display a leadership role in the rally over the past several years. This logic still stands. However, the Bulls have the window of opportunity today to break the overhead resistance directly above and embolden the case (similar to 1995) that the rally has the support of one of the most crucial sectors of the market. Furthermore, should the banks break through resistance over the coming weeks, it would support the secular shift I have noted since February away from smaller caps to the larger cap sectors of the market (see Here).
I find the similarities in structure, support and seasonality of the two time periods quite compelling. For the sake of consistency, I utilized the Goldman Sachs S&P 500 Bank Index, simply because the data for the BKX did not go as far back as the GSPBK.
It is amazing to note that although the SPX is significantly higher than in 1995, the banking sector roughly trades at the same valuation. As noted above, this dynamic could be painted both ways, however, should the banks breakout - the broader market would have a very deep well to drink from for further gains.
As always - stay frosty.