US equities virtually stalled their upward progress last week, with the S&P500 inching up only .39% on very light volume. Countering the slight move higher in prices, stock market volatility bumped upward…with the VIX index creeping a bit higher by the end of the week.
Since the bungee jump rebound started several weeks ago, this past week’s results suggest that the move may be stalling—-because the rise in prices has been decreasing in percentage terms every week, with last week’s rise being the smallest.
This leaves the US stock markets on the edge of big precipice—by recovering all of the October losses, and then some, the S&P500 has now rapidly returned to overbought and overstretched conditions last seen only at other dangerous times—1927, 2000, and 2007 being among them. Of course, as usual, today’s similar condition does not guarantee that a crash is around the corner, but it does guarantee that future returns will be lower (because prices have shot up so far and so fast already, there’s less room for them to keep rising at the same rate) and that there’s more downside risk than there was before the boomerang rebound (when prices fell 10%, they have—by definition—less room to fall further, because they’re that much close to the ground).
On the economic front, there’s really nothing very good to report. Initial jobless claims came in slightly worse than expected. Job openings (in the JOLTS survey) were lower than hoped for. Retail sales were just a bit better than predicted, as was consumer sentiment but that was only because future expectations jumped (current conditions were perceived to be horrible).
We’ve been spotlighting US interest rates, specifically the rate on the US 10 year note, for almost a year now. And the trade that has worked so well over this entire time keeps on working….with no end in sight.
Last year, when the 10 year touched 3.0% and 100 out of 100 economists surveyed by Bloomberg predicted that rates would rise to 3.25%-4.0% by the end of 2014, we saw things differently.
In an economy that’s not truly recovering, this rate had no business rising; in fact, it should be dropping.
And drop it did, first to the upper 2 percent range, then to the mid 2’s, and then to the lower 2% range, and on October 15th it touched 1.87%!
Today, it has rebounded back up a bit, to the 2.3% range, which is miles away from where ALL the “experts” predicted it would be this time of year.
So where will it go now?
Based on the same analysis that worked for us over the last 12 months, the rate on the 10 year should drop again, even from 2.3% where is sits today.
To be more precise, a return to, or even below, 1.87% should be considered very possible.
A catalyst for such a move would be another equity market sell-off (ala the one we saw in early October) which would drive scared money into US Treasuries….the same way it did in mid-October.
And since the S&P now sits at all-time highs again, this could be a good time to think about initiating this Treasury trade….again!