US Treasuries don’t agree with US Equities

The S&P500 dropped almost 2% last week in fairly light trading. VIX, as one would expect, jumped, but still not closing in any sort of clear zone associated with panic selling.

Technically, the sell-off last week brought a bearish tone to US stocks, but only on the daily charts. The uptrend on the weekly charts is still fully in tact. And even on the daily charts, in spite of the downturn, some sort of subsequent bounce would be very possible.

Several breadth indicators also turned down notably. For example, the new highs minus new lows index almost went negative at Friday’s close. Also, the percent of stocks  trading above their 50 day moving averages dropped significantly.

So while the US equity markets are still severely overbought on the weekly and monthly resolutions, they did ease off somewhat after last week’s 2% loss.

US macro news, meanwhile, continues to disappoint. The small business optimism index, the JOLTS survey, core PPI, import prices, and consumer sentiment were all worse than experts had predicted. Retail sales and wholesale trade, on the other hand, beat expectations. So the US economy continues to trudge forward lacking any robust growth, growth that’s been predicted to return every year starting in late 2009.

An interesting observation can be made by comparing the US equity markets to a few other markets to see if these other markets ‘confirm’ the equity market’s amazing exuberance.

Notably, the VIX index appears to be diverging—bearishly—from stocks. While stock markets were at or near their all time highs about a week ago, the VIX index failed to return back to the level it usually fell back to (around 12) when equity prices were peaking throughout 2013. Instead, the VIX fell back only part of the way. This suggests that investors are not so confident about these most recent equity highs.

More importantly, the US Treasury market in the fall of 2013 saw the 10 year Treasury creep up to 3.0% two times as equity markets peaked. The rise in rates makes sense if investors believe that the economy will be truly recovering and that paltry Treasury returns are inadequate when equity prices are poised to rise much more, by comparison. But in late February and early March, when equity prices returned to their peaks (and actually set new highs), the 10 year Treasury came nowhere near the former 3.0% level. What does this mean? One answer is that very big money (and the Treasury market is very big!) and very smart money (how many mom and pop Treasury traders do you know?) is worried that this most recent equity peak is not sustainable. And therefore, these big money traders are hanging onto, if not adding to, their safe harbor investment in US Treasuries.

So it seems that the US Treasury market is diverging—bearishly—from the US equity markets. Very shortly, we will see if these Treasury traders were onto something.

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