The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Yields
Yields globally continue to climb and in the US, yields broke above old highs. The 30 year yield climbed to a level not seen since 2007. The higher interest rates are pressuring stocks to the downside and concerns are swirling about potential rate hikes from the Fed. The S&P fell modestly today, bouncing before lunch, as equity dip-buyers kept things orderly. Capital flow was only slightly higher at 103% and the intraday range for the index was not large (~60 points).
From a technical perspective, the S&P continues to retrace some of the large gains from late March through mid May. The index is back at early May levels and is working off the overbought technical conditions of last week. Chart-watchers can rightly claim that the trend is paused. Whether the index is beginning a new downward trend or a sideways consolidation, is an active debate.
From a long-term trend standpoint, the index remains very extended to the upside. Major moving averages are below 7000. For spot to intersect with some of those, it will take a month of sideways trading or a very nasty pullback. The sentiment of the market remains sanguine so unless rates break the spirit of investors, a treading of water seems to be ahead.
All of these technical arguments/approaches assume no major news catalysts along the way. Peace with Iran, surprising results from Nvidia, or some other landscape-shifting event will push the market accordingly, whether the technicals support it or not.
Do we think we have significant fundamental news around the corner? There is always a chance for a surprise but markets are not nervous nor excited. Implied volatilities don’t suggest something brewing. We’ve become accustomed to the US/Iran threats, implications, and projections. We think we know what Nvidia is going to say. We don’t see other sources of market-moving news bubbling up to the surface.
The point is that while equity sentiment has just backed off from euphoric it remains optimistic and the attitude towards near-term risk is complacent. Usually complacency is considered a warning sign. In this case it may be warranted.
It may just be that we’re starting a stretch where surprises will be light and equity trading will be quiet.
It seems reasonable to me. The wild card is the yield curve. If the bond market doesn’t chill out, higher rates are going to cause all kinds of chaos.
See you tomorrow.
-Mike
Visdom Market Commentary
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