The stock market appears to be in a mania phase, with what seems to be a near-vertical climb in the last couple of days. There has been a rate of change that shows some acceleration in the trend. What is also noticeable in the SPY ETF is that there has been a deceleration in the volume. This could be due to the higher price, but I think it is likely due to a lack of sellers. If there were no buyers, the price wouldn’t rise.
Additionally, the S&P 500 saw its RSI climb to 81.7 and its %B climb to 1.1. This index is now trading above its upper Bollinger band, with an RSI in an extreme area. We are in that area where one would expect some form of consolidation, either by time or some meaningful pullback.
The NASDAQ 100 also has an RSI over 80 and is trading above its upper Bollinger band.
Is This Climb Sustainable?
In my opinion, the rally seems unsustainable at this point; it has entered the land of the stupid. We have seen everything breakdown. Realized volatility has reached such depressed levels that ten and 20-day realized volatility increased yesterday on the S&P 500.
The rule of 16 suggests that a move of 50 bps calls for a realized volatility of 8, so a 1% move, like yesterday, would suggest a realized vol of 16, and right now, we have a 20-day realized volatility of 6.4. One would think that realized vol just doesn’t have much lower; it can go lower, of course, but the odds do not favor that.
The 1-month implied correlation index was higher yesterday, too, because when the implied volatility of the index and its components rise, correlations go higher, which is what happened yesterday.
For the most part, IV for the MAG7 has probably reached some plateauing level, which means we are positioned at this point to see the implied correlation index bottom and probably start to turn higher at some point soon, especially if realized volatility keeps rising.
Since mid-June, Bitcoin has fallen by about 20%, and the S&P 500 has ignored the whole thing, which is bizarre because it doesn’t happen all that often.
Meanwhile, Wingstop (NASDAQ:WING) has fallen 11% in a few days, and the SPX doesn’t seem to care.
Tesla (NASDAQ:TSLA) has an RSI of almost 88 on the daily chart, which is just reaching those levels of not having much more room to rise, especially when hitting up against the upper Bollinger band.
At this point, today’s CPI report doesn’t even seem to matter; the SPX is so stretched that if it rallies today on the CPI, it will be even more overbought and extreme. One could argue we have entered a blow-off top because the angles of the advance have gone nearly linear, which is not sustainable nor sane.
Earnings estimates for this year have not improved at all, and 2025 estimates have improved by about $3 per share on estimates of $275 per share.
Meanwhile, investors are paying 32 times 2025 MAG7 earnings, for about 18% earnings growth from 2024 to 2025, on estimates that do not appear to be rising. This tells us that there are no fundamentals to support this market should sentiment change.
In fact, this whole thing feels very 1998 to 2000ish to me, even looking at the chart on a normalized basis. yesterday, the S&P 500, starting at the October 2022 lows, has exceeded the gains seen in the S&P 500, beginning in October 1998, over a similar period. Remember the period in the summer and fall of 1998 low was the Long-Term Capital Management and Asian Currency crisis.
What is funny about that rally starting October 1998 until March 2000, besides many of the companies no longer being around, is that Intel (NASDAQ:INTC) was the biggest contributor, and it only accounted for 10.2% of the gains in the Bloomberg 500, a proxy for the S&P 500. Meanwhile, the top 5 stocks accounted for roughly 41% of the gains.
From October 2022, the concentration has been much more heavily weighted, with Nvidia (NASDAQ:NVDA) accounting for almost 17% of the gains, while the top 5 accounts for roughly 45% of the gains