Equities Push to New Highs, but Investor Angst is on the Rise
Equities continue their ascent as the S&P 500 gained 1.3% on the week. The Semiconductor Index rose 4.5% on the week while the NASDAQ has risen for seven consecutive days. Dispersion in equities continues to be near record levels. Small caps ended the week down 1.5% and continue their material underperformance versus large caps.
This dispersion in equities isn’t just between growth and value names but is also significant within the growth space. For instance, the NASDAQ closed at a three-year high for seven consecutive days for only the 11th time in the last 30 years. In all 10 previous cases, new 52-week highs exceeded new 52-week lows on all seven days. This week, it only happened on one day as new lows outpaced new highs in six of the seven days.
The above situation in the NASDAQ has come close to triggering what is known as the Titanic Syndrome, which was created in 1965. If you have new lows outpacing new highs within seven trading days of a 52-week high, it could be a sign of a major market top. Due to a plethora of false signals, additional criteria were added that included new lows outpacing new highs for four out of five days and the index being down four out of five days. Essentially, you need the market to dip down to create the energy for the unwind and selling to beget further selling. If you see the NASDAQ roll over before the new lows dissipate, then the window is open for a larger drawdown. However, this type of historic dispersion has perked up the bearish sentiment to quite a high degree as the consensus view is this is a precursor to a sizeable drawdown. Bearish sentiment has been one of the primary drivers to equity outperformance in recent quarters.
Aside from skeptical sentiment, there is another market signal that may lend itself to suggesting a sharp sell-off isn’t imminent. The S&P 500 has recorded its lowest 10-day realized volatility in over five years outside of Thanksgiving week. At the index level, the S&P 500 is as boring as you can get. The current premium of implied volatility to realized volatility, at 36%, has been a level associated with near-term bottoms in the S&P 500 over the last two years. This is because implied volatility converges toward a lower realized volatility and equity markets generally rise when implied volatility is falling.
The rebuttal to this is that the first Presidential debate is in just seven days and if the elections in France are a guide, then the market is failing to appreciate election risks. Equities in France fell 5% in two days on election results that were only slightly off consensus expectations.
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Sources: BTC Capital Management, Bloomberg
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