Buy the Election….Sell the Inauguration?

The S&P500 went pretty much nowhere last week. To be precise, it slipped a minuscule 0.1%. Volume rose but this happened mainly because, by comparison, the prior week’s volume was shaved down by a holiday. S&P volatility remained super low—the VIX index hovered near the extreme lows last reached in the summer (of 2016) months.

As has been the case for the last several weeks, the S&P500 remains extremely overbought. On both the weekly and the daily charts, the S&P continues to hug the upper Bollinger band and is well above the 50 day moving average. From these levels, even a small pullback to this 50 day average would seem very reasonable over the next week or so.

Last week’s macro reports came in mostly on the weak side. While initial jobless claims were better (lower) than estimated, both wholesale trade and business inventories beat consensus estimates, everything else missed expectations. The labor market conditions index fell. Retail sales—both headline and core—missed consensus estimates. Consumer sentiment was lower than expected and core producer prices were hotter.

So as usual, there are no conclusive signs that the US economy is about enjoy any strong growth spurt. Instead, it continues to stumble along, the same way is has since it first came out of the Great Recession.

Finally, there’s been a lot of post-election analysis of the US stock markets—analysis that’s focused on the massive bounce that occurred after Trump got elected President. Most experts missed this trade; in fact, most of these same experts predicted the opposite—if Trump were to get elected, they claimed, then markets would tank. So over the these past 60+ days, many of these same experts have been jumping—even if a bit late—-onto this stock buying spree. Meanwhile, US Treasuries have been sold off hard; the US 10 year note yield has risen, just since the election, by almost 100 basis points.

But over the last couple of weeks, the US 10 year note yield has started backing off those highs. And as of Friday, this yield has now fallen by about 30 basis points. The reason this is important is because the yields in the US Treasury market are somewhat correlated to the US stock market prices: when stocks rise, US Treasury prices tend to fall….and vice versa.

So this recent decline in yields is important because it suggests that as more money flows into the safety of the Treasury market, that there’s a chance the buyers of Treasuries will be sellers of US stocks.

And given that there’s been such a huge run-up in stock prices since the election, even a modest selloff—after the inauguration—would make sense.

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