The Equity Melt-Up Resumes?

The S&P500 gained 1.2% last week. Volume was abysmally low, so there was no rush of buyers stampeding into stocks, most likely because most everyone who wants to own stocks already owns them. Volatility retreated back down somewhat, but the VIX did not return to the lows of 2014 when the most recent equity highs were hit. So there’s very little conviction behind the buying and yet, it could continue based on volatility levers which have further to fall just to return to recent lows.

The  technical picture is returning to the one we’ve seen over the last 18 months, one where stock prices are stretched, yet continue to stretch higher. Sure, prices have not returned back up to the most recent highs, and there’s no guaranty that they will. But the last two week recovery looks very similar to the recoveries that followed all the other minor sell-offs over the last year and a half. The next two weeks will tell us if the bounce back succeeds. At that time, prices would be back at, back above, the upper Bollinger bands on both the daily and weekly charts and this is a simple test of stocks being over bought…..once again.

Last week’s US macro news was mixed….once again. Retail sales, both headline and ex-autos, badly missed. At the same time, business inventories met expectations, as did producer prices both core and headline.  Initial jobless claims jumped up, well above expectations. Consumer  sentiment also disappointed. On the positive side, industrial production came in a bit better than consensus estimates. All in all, the same story about the US economy continues—we’re seeing a meager and halting recovery for Main Street, while we watch Wall Street flourish.

Around the world, several major stress points have recently grown in importance. In Ukraine, the east (Russia) is battling the west (US and Europe) over a strategically critical territory (Ukraine) that—if it becomes controlled by the west—would weaken both Russia and China….the only superpowers on the planet powerful enough to stand up to the US and Europe.

At the same time, a war has broken out in Iraq and Syria where one class of Muslims are attacking other classes……all the while, the US is trying to protect its interests (mainly oil-based) in the same region where the fighting has broken out.

Israel and Gaza are at attacking each other in what can most accurately be described as a war as well.

Tensions in the South China Sea are rising as China is asserting itself as the dominant power in this area.

And there’s more. All together, shockingly, almost 12% of the of the world’s population is engaged in some sort of fighting—whether open war, or low-level and intermittent clashes.

Yet equity markets in the west are at or near record highs. Corporate bond prices, both investment grade and high yield, are not far behind.

Something doesn’t make sense. Tensions, risks and problems around the world are growing—this should limit risk asset prices. But risk asset prices are not falling.

Sooner or later, one of these conditions must change—either the tensions will diminish or risk asset prices will fall.

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