Stocks are Bullish, while Commodities, Spreads, and Internals are Bearish

What a yo-yo last couple of weeks. After soaring in the entire month of October, the S&P500 plunged two weeks ago by about 3.6%.  But then, just like that, the S&P jumped right back last week, almost erasing the earlier loss, by gaining about 3.3%.

Volume, however, didn’t confirm the jump in prices because it was barely changed from the prior week. Also, volatility dipped only slightly; this also suggested that the coast was not clear for another rally to set another all-time high in stock prices.

The technical picture on the longer term weekly charts is still quite bearish. Not only is the 50 day moving average below the 200 day moving average, but because the highs set in October never exceeded the all-time highs set earlier in the year, what we see is a very long-range topping formation, a formation that we first mentioned here several months ago. This formation is seen when large institutional holders of stocks decide to distribute their holdings to less sophisticated retail (mom and pop) buys who’ve joined the stock market party near the time it usually ends. Sadly, these folks will be the bag holders when (or if you are simply always bullish, if) stocks enter a bear market cycle.

The US macro picture certainly didn’t get any stronger last week. The Empire State Manufacturing survey recorded another abysmally bad figure. Industrial production missed badly. The housing market index also missed. Housing starts disappointed. Initial jobless claims were higher than expected.

The big headline story of the week was that the Fed is on track to raise the fed funds rate by a quarter point in December….despite the fact that the US economy is clearly not showing any concrete signs of strong recovery…..fully 7 years after coming out of the last recession back in 2008.

Finally, the persistent strength in US equities has now started to puzzle more than one market analyst from Wall Street. While the S&P500 hovers just below all-time highs set earlier this year, commodity prices are dropping to 15 year lows. Copper and oil prices in particular have been substantially depressed lately. Also, credit spreads (between say high yield bonds and the comparable maturities in US Treasuries) have been widening over the last six months and are far greater (ie. worse) than they were when the S&P set all-time highs earlier in 2015. Finally, the breadth of the stock market rise recently has been horrible. It turns out that only a handful of massive market cap stocks (think Apple) have driven the overall index higher while at the same time a huge percentage of other stocks are still stuck below their respective 200 day moving averages.

All these other indicators are clearly bearish. And this divergence from the strong overall level of the S&P500 will not last forever.

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