Summary: Most of the US indices made new all-time highs this week. SPY is making 'higher highs' and 'higher lows' and is above all of its rising moving averages; this is the definition of an uptrend. Moreover, the cumulative advance-decline lines made new highs this week, indicating that breadth generally remains supportive. Net, there appears to be little reason to suspect the indices have reached an important top.
That said, NDX has opened a noteworthy crack in US equities. NDX has fallen 4.5% in the past week. In the past 7 years, falls of more than 4% in NDX have preceded falls in SPY of at least 3%. That doesn't sound like much, but it would be the largest drop so far in 2017. A key watch out now is whether NDX weakens further and breaks both its 50-d as well as its mid-May low; if so, then SPY is likely to follow with its first 5% correction since the US election. These are the consistent historical patterns. Moreover, by at least one measure, bullish sentiment is at a 3-1/2 year high.
Our overall message continues to be that (a) trend persistence in equity prices, together with decent underlying macro data, is likely to lead US indices higher over the next several months and probably through year-end; and (b) an interim drawdown of at least 3-5%, sooner rather than later, seems to be odds-on. A number of studies supporting this view were recently detailed here.
This week, SPY, DJIA, NYSE and RUT all closed at new all-time highs (ATH) on Tuesday. SPX has made 23 new ATHs this year. NDX, meanwhile, has closed above its 50-dma for more than 130 days in a row, the longest such streak since 1995 (from Bespoke). Both of these are clear indications of strong trend persistence. Enlarge any chart by clicking on it.
That the very broad NYSE (comprised of 2800 stocks) is also at an ATH confirms that breadth remains supportive of trend. Add to this: the cumulative advance-decline line for both the SPX as well as the NYSE (common stock only) reached new highs this week.
Several commentators have pointed to two indictions that the market is at high risk. Both appear to be without validity.
First, the yield curve has been flattening, supposedly indicating that the bond market views downside risk to growth (lower panel). That should, in turn, negatively impact equities (top panel). But the yield curve has been flattening for 3-1/2 years, and SPX has continued higher. The green arrows in the chart below show that this not been a reliable indicator in the past 20 years.
In fact, the yield curve has been of declining predictive ability over the past 30 years (red line; from the Leuthold Group).
The second concern that has been voiced is that the correlation of SPX to the volatility index (Vix) has spiked higher over the past 10 days (lower panel). When volatility rises together with equities, it can sometimes be a warning of a correction. But, as the chart below makes clear, that relationship is very inconsistent. Over the past 8 years, the odds of SPX (top panel) subsequently falling more than 2% has been equal to a 50-50 coin toss.