I hope you’ve all had a good week!
Although it may not feel like it, the US stock market made a new record high this week. Beneath the surface, the tug-of-war between value and growth segments of the market continues with bond yields dictating the action. As our related Checklists remain bullish, the general rise in equities makes sense this month, as does the general direction of the bond market – even if the recent rise is looking a little extreme.
Here’s a chart of the S&P 500, which almost touched 4000 before a down day yesterday. The market itself is hardly ‘overbought’ according to the RSI, which is barely above 50.
The rally this month has been supported by the positive score presented by our Equity Market Checklist, which totals +3. Whilst increasingly higher interest rates are making bonds appear relatively more attractive, compared to stocks, valuation is the only other negative in the measures we track.
Despite the sell-off at the beginning of the month, the market has responded as anticipated by our process. Furthermore, the oversold hourly condition around 3750 would have provided a great entry given an opposing extreme in price vs fundamentals.
For the most part it seems as though equity investors are looking beyond the prospect of higher interest rates in confidence that the rise is signalling better economic prospects for corporate profits. Of course, the speed of the move has been a little unsettling at times , and there will naturally be a level that the market is no longer willing to tolerate and could see a switch in asset preferences from stocks to bonds.
Without getting too far ahead of ourselves, we should once again refer to our process. The positive score in our Business Cycle Checklist suggests that the economy is improving, and validates the normalisation in rates from a record low level in 2020.
Alas, the continued easing by central banks around the world is the main reason why investors are worried about the risk of inflation. This for the most part has been the main driver of yields, and the following Checklist suggests that there may be too much stimulus hitting the system given the improvement in the economy already underway.
This explains the moves we are seeing, although the break above 1.60% this week on the US 10-Year following Jerome Powell’s comments has surprised many investors, myself included. It does appear to be more speculative, and a likely squeeze on the Fed and equity markets, although technical analysis suggests that the momentum could well see a continuation towards around 2%, and even 2.35% if that level is exceeded.
Whilst the move in the bond market is making all the headlines, our process is essential in understanding the fundamentals behind the move, and its sustainability. To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.
In the meantime, why not head over to our YouTube Channel for our latest FREE videos which I will be bringing to you each week in 2021! As there’s no charge for this content, it would be great if you could support the channel by leaving a comment and subscribing.
Have a great weekend,
James
Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.
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