The S&P500 rose 0.95% on very light volume last week. Volatility inched down, but only a bit because it has now almost returned back down to the lows of 2013.
Interestingly, the S&P climbed in the face of challenging news flow, especially out of Ukraine and the crisis that is now pitting the US and western Europe against Russia and possibly China. More than one government leader has warned that there are many similarities between this situation and the one that led up to World War I. So today, when analysts are sounding the alarms about WWIII, however remote the chances, the S&P500 simply shrugs them off and rallies on. Amazing.
Technically, the S&P500 remains very over-bought, pure and simple. On both the daily and weekly charts, the price is hugging the upper Bollinger band. But since the 50 day is above the 200 day moving average, and both moving averages are upward sloping, most every technical trader and investor will feel like there is no choice but to be long and stay long stocks. At the same time, however, lots of breadth indicators are weak or are weakening. Both the McClellan oscillator and the summation index have not returned to their recent highs the way S&P500 prices have. The same applies to new highs minus new lows, as well as the percent of stocks above their 150 day moving average—both of which are significantly weaker than they were at the prior stock market highs.
US macro results continue to be mixed. The Dallas Fed survey and the Chicago PMI both beat expectations, but consumer confidence, construction spending and the PMI manufacturing index all missed. The most important miss of the day was the horrible GDP result for the first quarter of 2014. Instead of growing at 1.1% as expected, GDP crept up at only 0.1%—-a massive miss. Initial jobless claims also missed badly. On the positive side, at first glance, payrolls rose more than expected. But beneath the surface of the jobs report, things were much uglier. Average hourly earnings didn’t rise at all—they were supposed to move up a healthy 0.2%. The labor force participation rate plunged to 62.8%, to the lowest level since 1978. About 800,000 jobless people left the workforce, because they were so discourage, and that means they no longer count as being unemployed. And that means the headline unemployment rate fell to 6.3% giving the appearance of a healthy jobs environment, when in fact nothing could be further from the truth.
Finally, starting about six months ago, we have been promoting the idea that US Treasury prices have fallen so much that they actually offered a good value. In other words, we projected that interest rates would fall over the following months.
At the same time, the consensus has been that US government interest rates would rise. And this view was strongly held and promoted by bankers, economists, and thousands of money managers around the world.
So what’s the verdict?
Well, about six months ago, the US 10 year Treasury hit 3.0%. Last Friday, it closed at 2.58% proving that the massive consensus among all those “professionals” was horribly wrong.
Not only did US Treasury rates not rise, they didn’t even remain unchanged. Instead, they plunged……just as we expected.
And the best part is that they may have even more room to fall.