Treasuries and Gold don’t agree with Stocks

The S&P500 started the new year with a bang—it jumped 2.6% for the week. This is a huge gain for only four trading days; the week was shortened by the New Year holiday. Volume, however, was quite low. And volatility plunged; the VIX index fell to some of the lowest levels in its history.

From a technical analysis perspective, the S&P500 is tracing out a blow-off top formation. On both the weekly and the daily charts, the S&P has rocketed way past its respective upper Bollinger band. This is a situation that is rarely witnessed; prices almost always stay within the two Bollinger bands. What makes this even more interesting is that this movement is happening after the S&P has already had a massive run-up in prices over the last 8-9 years. It seems like even the most reluctant and cautious bears are capitulating and buying into the US stock market frenzy…at prices that have never been higher. Apparently the simple concern about buying “high” has tossed out the window; the bigger concern is the “fear of missing out”.

In US macro news, the big story of the week was the disappointing payrolls report for December. New jobs came in far lower than expected. On the other hand, the rest of the report merely met expectations—average hourly earnings, the average workweek, and the unemployment rate. In other news, ISM manufacturing, construction spending, PMI services and factory orders all beat consensus estimates. On the other hand, initial jobless claims, international trade, and ISM services all missed.

Ironically, as the US equity markets continue to march higher, two other important markets are moving in the opposite direction—they’re movements are best explained by an economy that’s not doing so well. First, the US Treasury market yields, especially the 10 year yield, has not soared higher….as would be expected in an economy that’s growing strongly. In fact, the 10 year yield finished the year (2017) yielding slightly LESS than it did at the beginning of the year. Also, the price of gold has been soaring lately. For the entire year 2017, gold was one of the best performing asset classes. The problem is that gold would be expected to sell off when the stock markets rise—generally it’s an asset class that moves inversely to risk assets. But gold’s been rising lately, and that too signals that many investors are concerned in a way that’s not expressed in US stock market prices.

Yes, the strong uptrend in US stock markets must be respected; until it turns, it’s futile to fight it. But the contradictory movement in the US Treasury and gold markets must also be respected. They’re both telling a story that’s very different from the one being told by the stock market.

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