The S&P500 eked out a tiny gain of 0.16% last week on essentially nothing but hope. Volume was very light, and volatility barely changed from its already very complacent levels.
Breadth, as measured by the McClellan oscillator, was bearish. But when looking at the new highs less new lows, breadth did improve. The bullish percent index fell slightly, and put/call ratio was virtually unchanged.
Although there were few reports, the economic news continued to mostly disappoint. The small business optimism index missed already lowered expectations. US international trade was still solidly negative, not a good sign for upcoming GDP reports. While initial jobless claims beat expectations, the fact that the July 4th holiday split the week had a lot to do with the better than expected news. This is likely a one-time event. Despite the large drop in oil prices over the last month, producer prices fell much less than the consensus estimates; this means corporate profit margins will get squeezed more. And the biggest surprise of the week was probably the consumer sentiment result—it fell hard, instead of rising slightly as expected. This was the biggest miss since December 2009.
In technical terms, the S&P’s upward channel, on the daily charts. is still holding. Last week’s line in the sand—1,320—held. But on a weekly basis, the downtrend that began in April is still in effect. The recent highs are still much lower than the early 2012 highs, and until (or unless) these earlier highs are broken, the weekly downtrend must be respected.
So if the S&P500 seems to be holding up—not making new highs, but not collapsing either—then how do other correlated markets compare to US stock markets?
Let’s start with the euro in US dollars, which is usually positively correlated with US stocks. Last week the euro fell to its lowest level since mid-2010. Ever since early 2011, the euro has been in a long-term downtrend…..yet the US stock markets have been holding up.
How about the 10 year Treasury, which in terms of price is also positively correlated with US stocks. Last week the 10 year yield fell to a near record low, which was set only weeks earlier. How far back does the record go? Try 200+ years, since the United States was founded. Yet the US stock markets are ignoring this signal.
What about commodities? Well over the last two months, both oil and copper have dramatically pulled back in price. Yet the US stock markets are down only in the mid-single digits from their 2012 highs.
How can this be? While almost all other correlated asset classes are suggesting that US stock prices ought to be far lower, they’ve been holding up.
And as discussed before, the number one reason behind this resiliency is hope, specifically hope that the Federal Reserve will simply not let stocks fall very much.
Amazingly, after the US stock markets fell over 50% in 2002 and 2009, investors have brushed aside all evidence that the Federal Reserve is perfectly capable of losing control over the US stock markets, and are now hoping that this time is different.
We shall see.