US Treasury Rates Sliding….Again

September 26, 2016

The S&P500 climbed about 1.2% last week on light to moderate volume. Volatility dropped—the VIX index dipped back near, but not quite to, the lows of the year which were established in the summer months. While the S&P rose last week, it’s still not close to setting new highs, highs that were also established in the summer months.

Several key economic reports were announced last week. While the housing market index beat expectations, both housing starts and existing home sales (arguably both more important gauges than the housing market index), missed expectations. Initial jobless claims are still hovering near cycle lows. But the Chicago Fed national activity index, leading indicators and PMI flash manufacturing all missed. The big announcement of the week came from the Fed which decided not to raise rates….again.  Instead, they’re keeping short term rates pinned near zero even longer, all the while arguing that the economy is recovering yet again. The problem with this is that more and more regular American—who know that the economy has never truly recovered after the Great Recession —are beginning to understand that the Fed can’t argue that the economy is getting better while keeping rates so low and for so long. It’s a contradiction. The Fed is beginning to lose credibility not only with Wall Street, but lately even with Main Street.

And speaking of losing credibility, the US Treasury market rates have started to slide back down recently. After touching 1.75%, the 10 year Treasury yield has now fallen back below 1.60% and shows no signs of rising soon.

The reason this matters is that rising Treasury rates are typically associated with an improving economy, and therefore falling rates are associates with a deteriorating economy. After the 10 year rates jumped up from about 1.35% in late June (immediately after the Brexit vote was cast), the world took a breadth and realized that everything was not about to fall apart. So rates crept higher for most of the summer.

And it’s not just that lower rates are associated with lower prospects for economic growth; it’s also the case that falling rates are associated with lower prices for risk assets, such as stocks. When owners of stocks sell, they tend to buy up Treasuries to park their capital in a safe harbor.  This lowers yields.  And this is precisely what may be happening now as someone seems to be pushing the prices of US Treasuries higher… anticipation of a market decline.

US Stocks on a Precipice?

September 19, 2016

After skidding the prior week, the S&P500 inched back up about 0.5% the last week….on slightly higher volume. Volatility, as usual during a week when prices rise, crept back down. But the VIX index has not returned back down anywhere close to the lows seen during the summer months. Investors are much less complacent now.

Most of the US economic reports were released at the end of the week, and most of them were bad. Initial jobless claims rose instead of falling as expected. Retail sales were a disaster—both the headline number and the ex-autos number came in well below expectations. The Empire State manufacturing survey missed. Industrial production also missed. Business inventories missed. And consumer sentiment… guessed it…..missed. By all accounts, the US economy is not doing very well.

A very interesting technical picture is emerging for the S&P500. Over the last two years, a long-term topping formation has been forming, but this formation has been challenged lately, especially as earlier this year, the S&P rose above 2,100.

But more recently, the S&P500 has begun forming a short-term topping formation. After dropping for a couple of days in June after the Brexit vote, the S&P recovered all those losses and rose almost all the way up to 2,200 in July. But since then, the index has gone nowhere. More importantly, several key momentum indicators have turned down notably. MACD, for example, had turned bearish since late July. RSI has been deteriorating since mid July. And many others have done the same.

A week ago, the price of the index dropped below the 50 day moving average and has not recovered. Unless, this happens, a very reasonable downside target—and test—will be the 200 day moving average. This lies at around 2,058 or 4% below current prices.

Sure, a 4% drop would not be a huge loss  in the context of the massive run up over the last several years, but the S&& has not seen any type of similar losses since Brexit in late June and since the somewhat larger losses in late January.

So a 4% loss, in today’s world, would be noteworthy.

US Stocks Skid

September 12, 2016

After going almost nowhere for several weeks, the S&P500 slipped badly last week. The index lost 2.5%, with most of that loss coming on Friday alone. Volume for the week was light, but that’s mostly because of the Labor Day holiday. Volume on Friday, when the market sold off badly, was stronger. And volatility also spiked on Friday, but with the VIX reaching only the mid-teens, this “fear index” never reached the levels associated with panic sell-offs in the past.

There wasn’t much in the way of economic reports last week. PMI services missed expectations slightly. ISM services was the biggest story of the week—it missed badly. And this miss echoes the big miss in ISM manufacturing. Together, the two poor ISM results strongly suggest that the US economy is in a soft patch…..again. On the brighter side, initial jobless claims were a bit stronger than expected.

The technical picture changed dramatically. As discussed here last week, the S&P was poised to take a turn, up or down. And with the big sell-off in the books, it’s looking like the turn will be for the worse. That said, it will take much more than a one-day 2.5% drop to change the longer-term direction of the US equity markets. While prices did close below the 50 day moving average, this average is still well above the 200 day moving average. So the “golden cross” is still in effect. And therefore the short-term outlook has not really turned bearish….at least not yet.

Finally, well-known money manager and PhD economist John Hussman noted in his weekly newsletter that it takes a lot of discipline to sit out and miss the temporary gains that come with a bubble in equity markets. And he suggested that this is a lot easier to do, when one understands the consequences of participating in a bubble, falsely believing that this time is different, or just as badly, mistakenly believing that one will be able to sell at high prices when the bubble does in fact burst. He reminded readers that must:

Understand that valuation levels similar to the present have never been observed without the stock market losing half of its value, or more, over the completion of the market cycle.

So unless one is willing to endure such a huge setback in portfolio values, one must be willing to sit out the bubble and protect one’s assets from huge drops by investing more in cash and near-cash securities.

Unfortunately, most investors, amateur and professional, will not be so wise.



US Equities Still Hovering

September 6, 2016

After the prior week’s drop, last week the S&P500 reversed course and gained 0.5%. But once again, this gain—as have most gains in this index lately—was accomplished with very little volume, and therefore very little conviction. Volatility as measured by the VIX index, dipped  back down, but not all the way back down the lows reached in August.

US economic news was particularly poor last week. While personal income and personal spending met expectations, almost all the other reports for the week missed consensus expectations. The Dallas Fed manufacturing survey fell deeper into negative territory. The Case Shiller home price index missed badly. The Chicago PMI report was a disaster. Productivity continued plunging—which leads to soaring unit labor costs for corporations. The ISM manufacturing index crashed into contraction levels, well below expectations. Construction spending also missed badly. Factory orders also missed. And the big number of the week, payrolls for August, was a disappointment. In addition, the headline unemployment rate ticked higher (not good). And both average hourly earnings and the average workweek missed expectations. Many of these major economic indicators are now solidly at levels associated with recessions in the past; we’re going to have to wait and see if the same situation is occurring today as well.

Since the beginning of July, the S&P500 has gone essentially nowhere. While it dipped back down to about 2,000 in late June, it spiked back up to around 2,175 immediately afterwards and has not moved far from this level ever since. So this important large cap index continues to hover waiting for a catalyst to set its next course—up or down. Meanwhile, the price level is converging with the 50 day moving average, which will set up a test (ie. will prices bounce up from the 50 day or will they slide below?). But on the downside, the hovering over the last two months has virtually killed all upward momentum, and indicated for example by a declining set of MACD lines.

The bottom line is that the S&P500 is poised to take a turn—-upward or downward—very soon. It’s very unusual for this equity index to just sit at a price level for an extended period of time. And after two months of doing just that, it’s very likely that some sort of break out….or break down… around the corner.