Still—Treasuries Oversold and Stocks Overbought

The S&P500 breathed a little, after roaring higher in the aftermath of the Trump presidential election. Last week, the index retreated just under 1 percent. Volume was much higher than it was in the prior holiday-shortened week, and equity volatility inched higher, but it remained near the low end of its multi-year range.

In US macro news, the big story was the November jobs report. On the one hand, the total jobs figure beat expectations……but only very slightly. Also, the headline unemployment rate dropped even further… down to 4.6%.  But the real picture is not so rosy. Most of the new jobs created—as has been typical for the last several years—were low-paying, un-benefited, and low-skill jobs such as bartenders and waitresses. Meanwhile, good jobs that come with benefits and higher pay, such as manufacturing jobs, continued to disappear. Also, the headline unemployment rate fell but it fell mainly because people without jobs stopped looking for jobs. How do we know this? Among other data points. the labor force participation rate fell. Also on the negative side, average hourly earnings fell, instead of rising as expected. So the US jobs picture is great if you think like an economy with more bartenders and Walmart greeters who need to work two jobs now—since getting laid off from their old manufacturing jobs—to make ends meet.

In other macro news, the US housing market is showing signs of slowing down—the Case Shiller un-adjusted numbers showed that house price appreciation across 20 major cities has slowed almost to a standstill……far worse than expected. Pending home sales also collapsed. Also, initial jobless claims came in worse than expected. On the bright side, the Chicago PMI report, ISM manufacturing and consumer confidence all beat expectations.

Finally, the technical picture has hardly changed from the prior week. While US stocks eased off ever so slightly, US Treasury prices dipped a bit more last week!  This means that US stocks are still extremely overbought and that US Treasuries are still extremely oversold (remember, the 10 year Treasury yield has risen about 100 basis points from its late June lows….only FIVE months ago!). The natural trade—at least over the next week or two—would be to get long US Treasuries and to short US stocks. Let’s see how this works out.

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