The extended record-setting move up in the venerable S&P 500 is making any self-respecting seller “wanna holler and throw up both my hands,” and many of the weaker shorts are capitulating. This has my contrarian senses tingling.
Let’s have a look at what’s going on in three important markets, stocks, interest rates, and the US dollar.
Stocks buyers have been bolstered by an onslaught of corporate earnings and hopes for tax cuts. Juicing their enthusiasm has been a tremendous expansion in central bank balance sheets. That monetary largesse has helped shares continue their lengthy climb into rarefied air. The market has ignored Trump’s travails. As you can see on my daily candlestick chart below, the S&P 500 has seen a nearly uninterrupted blowoff move over the last two months.
Most indicators are bullish, but measures of sentiment have become extremely bearish. Volatility (fear) is utterly absent. Overly optimistic buyers could be in for a nasty surprise, as the latest push higher has left glaring a negative technical divergence between price and oscillating indicators. This tells us the market is not as strong as it may appear.
Interest rates have been falling for 25 years, but have bounced over the last two months. Money moving out of bonds has found a home in the stock market. After reaching 2.475%, the yield on 10-year Treasuries (see my candlestick chart below) has turned lower over the last two sessions. If rates can’t punch through the recent high, we may see a return to the “risk-off” trade and a move back out of stocks and into the perceived safety of T-bonds (lower yields). Time will tell if this time it is different and yields rise in earnest.
Rising bond yields and positive economic data have helped our beleaguered currency gain strength. Our Fed’s talk of returning to balance sheet normalcy ahead of its international counterparts has buoyed the buck. You can see the nice rounded bottom pattern formed on my chart below. A stronger dollar can pressure asset prices and has weighed on gold. Trends in currency direction are difficult to reverse.
With geopolitical tensions simmering and the next Fed chair about to be named, we stand at a key moment for these markets. Will we continue longstanding trends or will they be broken? We’ll be keeping our eyes on the character of the behavior of price movement for clues to the next major move.
Staying a step ahead of the crowd will be sweet music to our subscribers’ ears and to their portfolios.
I hope you found this post informative. Let me know if you have any questions and good luck in your trading.