(Bloomberg) -- Tension is building in the U.S. stock market, with a technical indicator suggesting that the S&P 500 Index is heading toward a significant move. What’s unknown is the direction.
That’s because lately, there’s been no shortage of contradictory narratives. Stock cheerleaders had seized on an unprecedented stretch of earnings upgrades, but that seems to be over. Bears touted the threat of accelerating inflation, yet the latest data showed no sign of it -- and 10-year Treasury yields have backed off from the 3 percent level seen by some as a watershed.
Further complicating things is President Donald Trump, who in less than a week has signed off on trade tariffs, ousted the secretary of State, unveiled a plan to meet North Korean dictator Kim Jong-Un and blocked a $117 billion tech deal.
That all translated into a rocky session Tuesday, when the S&P 500 gave back a 0.7 percent gain to end the session down almost the same amount. The reversal was an extension of a six-week trend, where the index’s trading range has slowly compressed as investors tussle over conflicting economic data and government policy. The benchmark gauge now is approaching the vertex of that triangle pattern.
As bulls and bears duke it out, more investors have stepped to the sidelines. According to a weekly survey from the American Association of Individual Investors. The proportion of respondents holding a neutral view on the market rose to 45 percent, the highest level since May 2016, the month before the U.K. vote to exit the European Union.
Such elevated readings have been rare during this bull market. Last time it occurred, stocks went on to an almost uninterrupted rally, through January this year. The two previous instances, however, preceded corrections.
“We’re going to ping-pong back and forth, whether it’s a good jobs number or some geopolitical concerns,” Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, said in an interview on Bloomberg Television.
Wilson, for one, thinks he knows which direction the tension will break towards.
“The next catalyst will break up to the upside, and it’s earnings. But that’s one and a half months away,” he said.
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