US Treasuries—Not Cheap to Cheap?

On ever falling volume, US stocks continued to rally last week, with the S&P500 climbing 2%….despite a slew of market and economic headwinds. The falling volume suggests that the rise was based more on a short-squeeze than any true change in investor sentiment. In other words, investors did not rush into the US stock market, with new money, to push near record high stocks to even higher prices. By all meaningful long-term (ie. 100+ year horizon) comparisons, stocks today in the US are not cheap, and are instead arguably expensive. Volatility, last week, did not change very significantly.

All eyes were on Russia and Greece last week. And while another cease-fire agreement was reached between the East (Russia and Eastern Ukraine) and the West (US, Europe and Western Ukraine), the Greek stand-off with Europe did not improve at all. Still, US equities rallied.

Technical analysis is once again screaming that the S&P is overbought on both the daily and the weekly charts. On both resolutions, prices are hugging the upper Bollinger band. And they are well above their respective 50 day moving averages. Entering at these levels on the charts can be risky in the near-term.

In economic news, small business optimism dropped instead of rising as predicted. Initial jobless claims jumped over 300,000, much more than expected. Retail sales were absolutely horrible. They fell almost 1% for both the headline results and for retail sales excluding autos. Business inventories fell; they were supposed to rise. Finally, consumer sentiment plunged, registering one of its biggest misses in years. On the positive side, sadly, there was no really “better than expected” report last week.

Finally, a few weeks ago, we noted that among the major asset classes available to US investors the US Treasuries were no longer cheap. Since the 10 year note had plunged in yield from about 3.0% to about 1.65%, the upside opportunity (in price) had been significantly diminished. Flash forward only two weeks, and today the US 10 year is suddenly offering a 2.10% yield. In the 10 year Treasury market, a rise in yields (ie. a collapse in prices) from 1.65% to 2.10% is absolutely massive….if it occurs over a mere 10 trading days. The US 10 year rarely jumps 45 basis points in only two weeks.

And since this is precisely what has happened, US Treasuries have now suddenly become extremely oversold and appetizingly cheap…..at least in the short-term. And given that the major global risk triggers are far from resolved and given that other major risk asset classes are back to all-time highs in prices, a trade—-from the long side—in US Treasuries begins to makes sense…..again.

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