Current Take

It's been 12 full trading days since the VIX poked itself above the much watched 20 level.  As we noted earlier in the month, buying the S&P 500 when the volatility index had risen above this level has provided steady opportunity for gains over the span of this bull market.  To review, since 2012, if you had bought the S&P each time the VIX clipped the 20-level you were likely to have achieved solid gains looking 5 to 50 days out.

According to the study above, the S&P has returned, on average, nearly 3.75% in the 10 days following a breach of the 20 level.  Last Thursday (7/23) was day 10 in this instance and at the time we were at least in spitting distance of staying on trend.  As of the close on Thursday, the S&P had risen 2.5% from its close on July 9th at 2,051.  At its high point on July 13th, the index got up to 2,116 which is a 3.1% gain.  However, in the two trading days since, the S&P has fallen swiftly and closed yesterday just 0.8% higher (2,067) than its 2,051 starting point.  Clearly, if the market intends to stay somewhat on trend with recent history it has its work cut out for it over the next 8 trading days.  The S&P has averaged a 20-day gain of 5.4% since 2012 when the VIX has traded above 20.  This would equate to an S&P close of 2,161 which is 85 points higher than where we're trading at this very moment.

One culprit in the S&P's inability to generate a sustained bounce is likely the lack of breadth and participation.  We've written on this topic many times before and you've likely seen renewed talk of it elsewhere in recent weeks.  Fewer and fewer sectors and stocks have been responsible for the market's recent thrusts higher.  As Andrew Adams of Raymond James summarizes:

The two graphics above illustrate an important point.  While the market has continued to move somewhat higher (ever so slightly) over the course of the year, it's done so with less leadership.  And while that can be fine for a time eventually one of two things happen:  the leaders stumble and take the market with them or the laggards play catch up.

It's now been nearly 4 years since the market's last 10% correction, much longer than the historical average and something that should not be ignored.  However, even with the recent weakness the S&P sits less than 3% from all-time highs.  Bears are going to need some additional catalysts in order to push this resilient market lower.

Looking more broadly at various levels, we'll be watching to see how the index handles any of the following:  a revisit to the 200-day moving average (currently at 2,065), the 2,040 - 2,050 zone which is the area of the most recent lows and the March lows, and lastly the 1,970 - 1,990 zone which would be going back to the December - January lows.  

We also believe that watching the monthly chart and its 12-month moving average continues to be a major tool.  A close below this indicator would likely introduce further weakness while staying above at the end of July could serve as the basis for a trip back up to the top end of the range.