See the chart below for the almost entirely clear gap in the Vector Strength Distribution from 572 to 617. However, a closer look and some consideration reveals that even SPY > 560 is, at present, not easy to justify conceptually.
At ~550, the SPY is currently between the two highest rungs of the levelled up sections of both Vector Set 1 (vs1) and Vector Set 36 (vs36). These rungs stand between SPY and the bottom of the gap, at 572. Though I generally prefer to focus on the stronger Vector Set, which would be vs1 (the strongest, by definition), I will focus my comments on vs36, as the top and bottoms that anchor it (its “VecDates” in the figure above) are much more recent.
The slope of vs36 reflects the net vector balance trajectory formed by the December 2018 and October 2022 bottoms. When considering what would justify price totally breaking beyond vs36 first we asked ourselves if the slope of this line is woefully inadequate to capture the growth trajectory for SPY since the later VecDate, October 2022. Then we asked if the gap between the line connecting these bottoms and a parallel line drawn through the peak in the SPY in January 2020, which completes the core of vs36, is large enough to represent a still valid standard for “jump” type volatility.
We aren’t experts on these matters, but fwiw, we think the slope between vs36’s bottoms is still reasonable. First, and most obviously, it is a good match to the slope between the January 2022 and July 2024 top, a period which encompasses basically all the history post the last VecDate of vs36, so there is that. But more conceptually, both the Dec2018 and Oct2022 bottoms occurred in the context of tightening monetary policy and loose fiscal policy, so the slope is a fairly pure representation on private sector organic growth. Thus, the question is an interesting one – is the outlook for SPY’s organic growth today markedly better than it was in Dec2018-Oct2022 period? Recall that Covid accelerated technological development and deployment considerably. Growing civil unrest and increasing climate change concerns are important offsets to growth during this period (that we need to add VecEvents for), but only partial and its not our opinion that they have diminished. Since 2022 the advent of large language AI models like ChatGPT is very exciting but the economic benefits beyond the chip suppliers are largely to be determined (GitHub’s coding co-pilot debuted in 2021). Furthermore, we have much less flexibility to support growth through fiscal expansion, and more challenging geopolitics today than we did in 2022.
Whether the width of this channel still adequate to be a standard for scaling potential jump volatility in SPY is perhaps the tougher question. Given the general inflation that has occurred since Oct2022 maybe not. That said, consider that it was able to accommodate both the cascade lower in the SPY at the outset of Covid and the liquidity / speculation fueled surge to the upside into January 2022. We are sure that the general inflation since 2022 has more of an impact on the nomimal valuation of the S&P500 than the advent of wallstreetbets, Robin Hood, etc.. did during 2021.
Not saying that we cannot escape this vs36 (or vs1) on a sustained basis. I just struggle to conceive the justification for it near term, but that can change with the passage of time, new information, etc..
In case I am wrong (it happens), a quick view of the Vector Set at which heavy resistance starts in the 617 area, vs5 (there are a few lines in the gap, the strongest being vs16). The 617 level represents the start of the middle of its levelled up channel. It’s core reflects the advent of LLM powered AI, with the July 2024 top among its anchors, with its 1.0 level at 572, the aforementioned start of the gap to the upside. Not clear to me what justifies sustained levelling up from the core of vs5 on a sustained basis given it was just formed in July.
Also perhaps note-able on the topic of “in case I am wrong” is that the Vector Model puts the 10 day forward “Expected Up Body” for the SPY at 573. In other words, if the SPY trades higher over the next two weeks, the Vector Model would consider 573 to be the expected value for the SPY excluding the 95th and higher upward percentiles (the tail to the upside).
Finally, for the record, I should share here that the V-Score for the SPY is presently a +1.0 (on a -12 to +12 scale ordered from bearish to bullish). SPY’s closest V-Score criteria historic ticker-model date matches by time horizon are available on the VecViz Dashboards section of the website, as are the Vector Strength Histogram charts seen above.
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For reference purposes, on 9/19/24, two weeks following the date of the charts discussed in the post above, and the day following the Fed’s 50bp cut, the SPY reached an intraday all time high of 572.88, but closed at 570.90.
For reference purposes, the V-Score for SPY moved to 0 as of the close on 9/19/24.