Looking Forward After Last Week's Price Action
Stocks showed some strength last week, as did bonds.
For stocks, a group of the portoflio models we follow show gains in stocks between 0.75% - 1.69% so far in the month of May, with most YTD numbers positive. An indicator we follow that has proved uncannily accurate over time had declined two weeks ago to its moving average only to reverse pretty strongly last week. That pattern - strong reversal after declining to its moving average - has held over the past few years, each time the stock bull market seemed about to reverse. So from that persepctive, the stock bull market seems to be in good health for now.
As for bonds, those 10-year yields backed off their highs. So far, any rise has remained tempered.
Besdies stocks and bonds. gold and precious metals miners had a relatively upbeat week, with mining stocks giving a slight hint of strength, after languishing most of this year. But given that we're in a traditionally weak season for gold, we're not holding our breath for any substantial rally. For that to happen, you'd need a break above 1350 that holds, then forges higher. Then again, the slight muscle-flexing in gold may simply be a response to pause in the recent US dollar rally that saw the buck slip back below 93. So things remain pretty much range bound, albeit with a slight upward bias. Oil seems to want to go higher, with some of our sources calling for a rise from 70 to 80, possibly to 100 before the year is out. That would, of course, sustain what has been a decent rise for energy stocks recently.
Back to the general stock market, while it wouldn't be a shock if we had some weakness this coming week, our best guess is that stocks will build on last week's strength in the short-intermediate term. As for bonds, skepticism about any big spikes in yields remains our go-to position.
Of note in all this is what looks like a strengthening of correlation between movements of stock and bond prices. This could prove to be a problem for some of us who operate under the assumption that holding bonds serves as a kind of offset or balance to our stock holdings: Id stocks fall in price, bonds will hold steady and rise a bit to offset that fall. But let's remember that in the 2008 stock price plunge, bonds fell as well, with the exception of US treasuries. Treausuries were "safe havens" during that stormy period and served as a source of strenghth. But for investors who hold corporate bonds of varying credit strength, if these begin to move in tandem with stocks, a portfolio doesn't really have much balance to it.
What this means is that, in addition to the concern that yields will continue to rise (causing bond prices to fall), bonds prices will also be subject to the whims of the stock market, if they are indeed moving in tandem with it. So any protection or diversification you thought you had goes out the window. If that's so, you need to find diversifcation elsewhere, or adjust your stragegic positioning of bonds.
Now, let's say the short to intermediate term proves bullish for stocks. What about farther out? Of course, the farther out you look, the hazier the view. Long-term predictions typically are the hardest to make, and we're not making one here. But we do wonder whether there stock market has been forming a "top" in recent months. After all, money flows into stock funds has declined, and the rally off the recent stock market correction has taken place with lower trading volume - usually a bearish sign. So, as we've mentioned in the past, our vigilance has been spiking regarding stocks. Internal deterioration of the major averages has held, without any significant signs of health. While the small stocks have pushed higher, the major averages haven't broken decisively back into a bullish pattern. After this week - especially if we get weak action throughout - we should find out whether stocks will continue their recovery from correction.
Of course, even if they do, that doesn't mean any strength might not simply be the formation of a long-term top, leading to an even stronger break-down later in the year. You see a segment of the investment community hawking this view, even in the face of the general bullish commentary that sprang up last week in the face of that stock market strength.
For stocks, a group of the portoflio models we follow show gains in stocks between 0.75% - 1.69% so far in the month of May, with most YTD numbers positive. An indicator we follow that has proved uncannily accurate over time had declined two weeks ago to its moving average only to reverse pretty strongly last week. That pattern - strong reversal after declining to its moving average - has held over the past few years, each time the stock bull market seemed about to reverse. So from that persepctive, the stock bull market seems to be in good health for now.
As for bonds, those 10-year yields backed off their highs. So far, any rise has remained tempered.
Besdies stocks and bonds. gold and precious metals miners had a relatively upbeat week, with mining stocks giving a slight hint of strength, after languishing most of this year. But given that we're in a traditionally weak season for gold, we're not holding our breath for any substantial rally. For that to happen, you'd need a break above 1350 that holds, then forges higher. Then again, the slight muscle-flexing in gold may simply be a response to pause in the recent US dollar rally that saw the buck slip back below 93. So things remain pretty much range bound, albeit with a slight upward bias. Oil seems to want to go higher, with some of our sources calling for a rise from 70 to 80, possibly to 100 before the year is out. That would, of course, sustain what has been a decent rise for energy stocks recently.
Back to the general stock market, while it wouldn't be a shock if we had some weakness this coming week, our best guess is that stocks will build on last week's strength in the short-intermediate term. As for bonds, skepticism about any big spikes in yields remains our go-to position.
Of note in all this is what looks like a strengthening of correlation between movements of stock and bond prices. This could prove to be a problem for some of us who operate under the assumption that holding bonds serves as a kind of offset or balance to our stock holdings: Id stocks fall in price, bonds will hold steady and rise a bit to offset that fall. But let's remember that in the 2008 stock price plunge, bonds fell as well, with the exception of US treasuries. Treausuries were "safe havens" during that stormy period and served as a source of strenghth. But for investors who hold corporate bonds of varying credit strength, if these begin to move in tandem with stocks, a portfolio doesn't really have much balance to it.
What this means is that, in addition to the concern that yields will continue to rise (causing bond prices to fall), bonds prices will also be subject to the whims of the stock market, if they are indeed moving in tandem with it. So any protection or diversification you thought you had goes out the window. If that's so, you need to find diversifcation elsewhere, or adjust your stragegic positioning of bonds.
Now, let's say the short to intermediate term proves bullish for stocks. What about farther out? Of course, the farther out you look, the hazier the view. Long-term predictions typically are the hardest to make, and we're not making one here. But we do wonder whether there stock market has been forming a "top" in recent months. After all, money flows into stock funds has declined, and the rally off the recent stock market correction has taken place with lower trading volume - usually a bearish sign. So, as we've mentioned in the past, our vigilance has been spiking regarding stocks. Internal deterioration of the major averages has held, without any significant signs of health. While the small stocks have pushed higher, the major averages haven't broken decisively back into a bullish pattern. After this week - especially if we get weak action throughout - we should find out whether stocks will continue their recovery from correction.
Of course, even if they do, that doesn't mean any strength might not simply be the formation of a long-term top, leading to an even stronger break-down later in the year. You see a segment of the investment community hawking this view, even in the face of the general bullish commentary that sprang up last week in the face of that stock market strength.
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