The S&P500 continued to grind upward, despite the initial Brexit setback, and last week it registered another solid gain. This time is was up 1.28%. Volume however was very light, and this implies that the average mom and pop investor was not participating in the rally. In other words, new money did not rush in to buy. Instead, the usual drivers—corporate buybacks and short covering explain most of the gain. Volatility dipped back down, almost to the lows of the year, as measured by the VIX index.
In economic news in the US last week, factory orders dropped, but they dropped by exactly as much as economists predicted. Our international trade deficit came in a bit worse than expected. ISM services, on the other hand, beat consensus estimates. The big news of the week was US payrolls, which beat estimates with as much of a shock as it missed estimates the month before. But while the number of bartender and waitressing jobs continues to soar, the actual unemployment rate ticked higher (bad), and average hourly earnings missed expectations (also bad). That said, the payrolls beat was the big driver of the US equity price jump last week.
The technical picture for the S&P500 is becoming murky: the two-year topping formation is now in jeopardy of being weakened, because the S&P is now very close to setting new all-time highs. Of course, for this topping formation to be completely nullified, not only do new highs have to be set, but they have to hold and then the market would have to continue to grind higher. As of last Friday, new highs had not been set.
All that said, in the short term, the S&P is now somewhat overbought. And a pullback, even a modest one, would be perfectly normal at these high levels.
Finally, as described last week, while the S&P500 has been grinding higher, the US Treasury rates have been grinding lower. Remember, this is not supposed to happen. Normally, when US stocks are bought, buyers sell US Treasuries, in part, to fund the purchase of US stocks, and as a result of the Treasury selling, Treasury rates normally would rise.
Instead, last week, the US 10 year Treasury rate set the lowest rate in the history of the United States…..1.33%. This is not supposed to happen. It seems that while US equity prices march higher, big money is running for cover and buying US Treasuries (at record low yields). So this is a HUGE divergence from normal historical patterns. One of these markets is most likely very wrong—either US stock prices are too high and will come down, or US Treasury rates are too low, and will go back up.
Although this divergence will probably not resolve itself in a week or so, it will very likely end sometime this year….over the next few months.