INVESTORS are beginning to wonder if this “Energizer Bunny” of a rally can just keep going without taking a break or a fall.
Every Friday for the past couple of months, the question has hung in the back of investors’ minds: Is the stock market’s rally strong enough to continue without a correction?
Even with the S&P 500 above levels unseen since before the financial crisis, the answer remains: Yes.
The broad market index broke through 1,400 – a psychologically important level – for the first time in four years last week. On Friday, the S&P 500 closed at 1,404.17, its highest since May 20, 2008. At Friday’s close, the index was up for nine out of the past 10 weeks.
The rally has taken the Nasdaq up to a 12-year recovery high, while it lifted the Dow comfortably above 13,000 to its highest level since December 2007.
“We are seeing this unbelievable rally in the market and yet the market is unbelievably complacent. We haven’t been this bullish for a long time,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research, based in Austin, Texas.
Indeed, the CBOE Volatility Index or VIX, Wall Street’s fear gauge, plunged to a five-year low despite the S&P 500’s stunning gain of 12 per cent for the year so far. The VIX measures the expected volatility in the S&P 500 index over the next 30 days and generally moves in the opposite direction of the broad market. Investors often use VIX options and futures as a hedge against a market decline.
Frederick said the only concern is the wide spread between second- and third-month VIX futures, suggesting a rise in volatility in the longer term. But the front-month futures that expire this week have come down to levels near the spot VIX. The VIX fell 6.2 per cent on Friday to end at 14.47, its lowest close since June 2007.
“I would like to see the VIX around 17 just because it tends to have a significant pop when there is bad news at current levels,” Frederick said, adding that there isn’t that much negative news out there.
Further evidence of the market’s bullish sentiment: The S&P 400 Midcap Index has popped above the 1,000 mark, an area of strong resistance since last year, according to Ryan Detrick, a senior technical strategist with Schaeffer’s Investment Research, in Cincinnati. “Historically, April has been a strong month so we can even see the market going up to 1,440, which is the high made in May 2008,” Detrick said.