While most global equity indices have broken out of recent ranges, the S&P 500 and the Dow (Jones Industrial Avg) are the only two to reach new all-time highs among the developed markets. Those two indexes are so strong that they are reaching overbought territory on weekly charts for the first time in years. The lack of daily chart bearish divergence, however, suggests that more evidence of a top is necessary for investors to even start of thinking of selling shares or even establishing a major short position in equities, especially within the Dow Jones 30 or S&P 500.
It wouldn't be shocking to see markets pull-back (on risk-taking) given the macro-economic uncertainty and the potential economic impact or fall-out from the recent (UK's) Brexit vote. For now, however, it seems that any dips in equities should attract buyers given the early stage we're in within the latest uptrend and the position of key moving averages with respect to current price-action. Friday's consumer confidence numbers, however, which showed a substantial drop, are an area of concern and serve as a reminder of how fragile consumer psychology is at the moment. A continuing trend of weakened confidence could turn out to greatly affect future (economic) output and could potentially provide a headwind to a market that is trying to grapple with the fact that two out three of the major stock (US) indices are at all-time record highs.
With the bulk of important key (US) economic behind us this month, the ushering of the (US)earning season could play a much bigger role influencing market psychology. This would greatly impact whether short-covering bond bulls (that were already extremely long going into last week) will cover more of their (long) exposure. That said, it has been well-telegraphed that (US) earnings growth has endured several consecutive quarters of decline, which will put more emphasis on (earnings) guidance. This will be key in deciding whether equities can continue their hot run of late and continue to influence bonds to sell-off.
While the stabilization of global bond yields is a promising sign for markets, a lot of the latest move is fueled by the unwinding of a very crowded (treasury market) long trade. Which means that it will take much more evidence for the bond market to believe that yields globally have found a bottom. The key (US) 10-year yield reached new all-time lows ahead of the nfp (non-farm payrolls number), but were only down at record (low) levels for a brief amount of time ahead of the strong rally (in yields) across the curve. Stronger-than-expected (US) economic data would continue to stimulate expectations of further central bank action and with the Bank of Canada and the Bank of England on hold last week, there is a thought that expectations for further easing by major central banks could be abating. We will of course see this week when the ECB meets and the Fed meet the following week.
As mentioned before, bond yield stabilization on the whole is a net positive for the stock market, the real wild card, however, resides in the foreign exchange markets. The downside to this recent (unexpected) bout of US economic strength and the resulting back-up in yields, is that it boost yield differentials in favor of the US dollar. This was seen heading into the past weekend as the DXY (US Dollar Index) managed to advance accordingly (along with bond yields) and is now threatening to extend the post-Brexit bounce that has been consolidating since the British pound collapsed to a 30-year low.
The greenback may provide a temporary headwind until the dollar seasonal weakness sets in usually seen in the back-end of the summer through the end of the year. In the meantime, while many continue to struggle comprehending how the market continues to climb the
proverbial wall of worry despite such fundamental uncertainty, the fact remains that
the charts don't lie and the (up) trend is your friend. Momentum in stocks around the world is clearly to
the upside and until we get evidence of a real top (in stock prices) or
show signs of exhausted buyers (which we haven't yet), the bias should continue to favor further upside in equity prices.
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