So now after several weeks of bouncing, the S&P500 has really risen to the upper limits of what’s normal for such a short period of time—last week, the large cap index again rose, this time about 1.4%. Volume was very light, but that was mainly due to the holiday shortened week (Thanksgiving). And volatility in equities fell back some more, but not quite down to the doldrums reached over the summer months.
US macro news was once again mixed. The week got off to a disappointing start with the Chicago Fed National Activity Index logging another negative print. On the other hand, the Richmond Fed manufacturing survey and the existing home sales report both exceeded consensus estimates. Durable goods orders also beat expectations. But the FHFA house price index missed. So did new home sales. International trade was a disaster….the big miss will negatively impact the next US GDP report. And PMI flash services also missed. In these last few months, nothing—as usual—has changed for the US economy, which still, fully seven years after coming out of the Great Recession, has never achieved robust growth, growth that would have reversed the disturbing trend in the labor force participation rate which captures all the discouraged workers who are not counted in headline unemployment numbers because they’ve simply given up looking for jobs.
Since the post-election bounce began, several key developments have occurred in the financial marketplace. The USD has soared; while it was already creeping higher in the weeks and months before the election, it really took off after Trump was elected. Next, we we’ve discussed here over the last several weeks, US equity prices have soared. Given that volumes are not huge and given that the dispersion is high (both new highs and new lows are rising), this looks more like a blow-off top than the beginning of a serious move higher and the resumption of a multi-month bull market. Finally, US Treasury prices, the day after the US election results were announced, made a huge move—-lower. This in turn, has driven interest rates much higher.
So where does this leave us? Simple—-US equity prices are extremely overbought (on multiple technical measures) and at the same time US Treasury prices are extremely oversold (using similar technical measures). As a result, anyone who buys US equities now (or sell US Treasuries) will be taking a huge risk that a reversal—-even if it’s short-lived—-will hurt them. On the other hand, making the reverse trade (buying Treasuries and selling US equities) looks like a much safer bet.