While the market is never short on worries, the ability from traders and investors to consistently shrug off potential headwinds has been somewhat of a surprise in the first half of 2014. In fact, stocks seemed overdue for at least a pullback and a return to more volatile market activity, but that has yet to materialize. In our latest interview with Toni Turner of TrendStar Trading Group, we discuss what the continued absence of volatility is telling us about the current state of the market.
EQ: We’re near the halfway mark for the year, and among some of the bigger surprises this year is the absence of volatility. In fact, volatility is reportedly at a seven-year low. What gives?
Turner: That’s absolutely right. The Volatility index was recently at the lows it hasn’t experienced since 2007, and of course, that number always brings anxiety into the heart of the market. Of course, we have to remember that the VIX represents a measure of the market’s expectation of volatility over the next 30-day period.
Since the S&P 500 just keeps making new highs, the shorts have been repeatedly taken behind the woodshed and I think we’re seeing this market as cheerful, but very apathetic. We haven’t had a headline in a long time that has had the power to scare the market into a 10% correction.
It’s interesting to note that the Dow experiences a bull market correction every 12 months on average. Right now, the Dow is up about 59% from the last correction low of October 2011, and into its 37th month without a pullback.
Still, the bears have been proven wrong, so maybe our complacency right now could also be from their disinterest.
EQ: Earlier this week, revised numbers for Q1 GDP showed a 2.9% decline. The market managed to shrug off the revision with the expectation that the next three quarters would get a nice rebound from the bad winter. But that’s now in question as Q2’s forecast has also been ratcheted down on consumer weakness. Do you think this could manifest into a bigger problem for the rest of the year?
Turner: That may be. Durable goods orders were also down 1% for May, and that’s a more recent report. We do see last month’s jobs numbers improving, however, the numbers out of the Commerce Department Thursday said inflation is heating up, but consumer spending is flat.
This can be a problem because points to slow growth with rising inflation. That could put a hitch in the stock market’s giddy-up. Of course, it would cause traders and investors to be more selective in stock choices.
EQ: Despite all the possible headwinds to worry about, the market continues to defy bears to keep hitting new highs. Are there any technical levels right now that stand in the way?
Turner: Of course, there’s 2000 on the S&P 500 as a key technical level. Then there’s 2300 is another key level, but we don’t have to worry about that for a while.
Interestingly, I pulled up the monthly chart of the S&P 500, and you can see that the last time the 14-month relative strength index was this overbought was in 2007 and in 1998. That 2007 RSI overbought level also goes for the PowerShares QQQ (QQQ) .
So while this market can certainly go higher in the current low-interest rate environment, once again, I’m suggesting that traders and investors have a plan in case the market decides to take a headwind seriously and profit taking comes in.
EQ: What sectors or industry groups are you watching now?
Turner: Well, because interest rates are falling in the short term—and that dynamic may reverse later in the year—we can look at the iShares US Home Construction (ITB) . Also in the same is the SPDR S&P Homebuilders ETF (XHB) .
I’m looking also at the PowerShares WilderHill Clean Energy (PBW) . I suspect that whether we like it or not, green renewable energy is going to be a definite wave of the future. It’s had some struggles to start, but it’s definitely going to happen. Some of the top components in this ETF are Polypore Intl, Inc. (PPO) , SunPower Corp. (SPWR) , and Calpine Corp. (CPN) .
One of my strategies is to explore a sector ETF that I think has promise, and either trade that or trade it in concert with some of the attractive stocks within that component list.