Nice record high for the S&P 500, but need more upside follow-through.
Well we got the new highs in the S&P 500 Index yesterday that everyone was looking for, so it was obviously a good day for the stock market. The DJIA is still slightly below its record highs and the Nasdaq Composite is a hair below its July record highs as well…but they are very, very close, so it certainly cannot be called a divergence. Yes, the Russell 2000 remains 2.7% below its April highs, but it has been playing catch-up during the past few weeks, so the action in the small-caps can hardly be called disappointing.
We must say that the “internals” weren’t great…as volume was less than 3bn shares and the breadth on both the S&P 500 and the NSYE Composite Index were just 1.6 to 1 positive, but given that the NYSE A/D line was able to make a new high along with the SPX…and the tech stocks led the way higher, it’s hard to find much fault with yesterday’s action.
Recent moves cannot be seen as anything more than technical bounces (yet).
However, things could change very quickly…with the Fed’s meeting/press conference on Wednesday and the ISM and employment data on Friday. More importantly, besides the fact that most of the broad averages have yet to make a new high, the S&P’s record is only a very slight new high. Therefore, we are a long was from confirming a breakout in the stock market. In other words, as positive as the recent action has been, it cannot be seen as anything more than another bounce up to the top-end of the range we’ve been in for 21 months (at least not yet)….and we’ll NEED to see a more meaningful push above the old highs before we can confirm a break-out has taken place.
10-year Treasury yield closing-in on key resistance
We’d like to move to the Treasury market. It had become extremely overbought back in late August…and thus we said it had become incredibly ripe for tradeable pull-back (and therefore we were also calling for a tradable bounce in long-term interest rates). Sure enough, the yield on the 10yr note rose over 30% over the next few weeks…moving from below 1.5% to 1.9%. So that call worked-out very well.
Since then, rates saw another dip, but they did not fall back to the late August/early September lows…and then they bounced-back (over the past few weeks). This means that the 10yr yield made a “higher-low”…and it is now getting close to testing its September highs. In other words, a move above the 1.9% level will give yields their first “higher-high” of 2019 (as well as its first “higher-low/higher-high” sequence of the year)! On top of this, a move above 1.9% will also take the 10yr yield above its trend-line going back to the highs we saw in the 4th quarter of last year. Therefore, we can now say that the stock market is not the only one that stands at a critical juncture on a technical basis. The Treasury market has reached a very important level as well. (1st chart attached below.)
A breakout in any of these markets is not guaranteed (by a long shot).
To be honest, we are not looking for a major breakout in interest rates. We do not believe the economy is about to bounce in a major way. Even if (when) the U.S. & China sign a “Phase 1” deal, the tensions (and the tariffs) will remain in place. This, in turn, will mean the uncertainties surrounding this key issue will remain…and thus the global economy will continue to face serious headwinds due to this issue. HOWEVER, if we’re wrong…and if (repeat, IF) the yield on the 10yr note breaks above its key resistance level of 1.9% in any meaningful way…it just might be a signal that we’ll still see SOME improvement in growth…..No, we’re not saying that a breakout in rates from here will lead to a major rise in rates (to 3% or higher), but if the yield can move above 2%...and hold there…it should have an important impact on several different interest rate sensitive groups (banks, utilities, housing, etc.).
To reiterate…what we are saying is that we are not just at a critical juncture in the stock market…with it making slight new all-time highs. As we mentioned last week, the dollar is at an important juncture (when it tested its downward sloping trend-channel)…and now the Treasury market is testing the top of its most recent downward sloping trend. So it’s a critical juncture for MANY different markets!
It’s funny. With the stock market rising recently…and long-term interest rates doing the same…it has led a lot of pundits to suggest that the worst of the global economic downturn is behind us. That’s fine…as this kind of reaction to a change in the markets is human nature (just like it was natural for people to worry about an impending recession when the stock market and interest rates pulled-back in August). However, as we said about the stock market above, none of these moves can be seen as anything but a bounce from oversold conditions…and we’re going to have to see more upside follow-through before one could say with any real confidence that these moves are anything more than technical ones. (Of course, the move in the dollar would be in the other direction. We’d have to see a meaningful break-DOWN in the greenback…below its upward sloping trend-channel to confirm a change in trend.)
Therefore, despite all the hoopla around the new high in the S&P 500 yesterday, nobody can realistically make ANY definitive conclusions from the recent action in any of the markets. Therefore, the events of this week (earnings, the Fed, economic data) should STILL be very influential as to where the market go over the rest of the year. Hold on to your hats. Whether the these markets are “breakouts”…or revert back to their previous trend-channels/ranges…the upcoming moves should be substantial ones.
Beyond Meat (BYND)...Great call, but what next?
We’ll finish by making a quick comment about the stock, Beyond Meat. Back in late July (on the weekend of July 27/28), we said that the stock was out of control…and that we wouldn’t buy it at its current level (which was $222 at the time) for anything in the world. We said that it had become ridiculously over-bought, and therefore it should be avoided on the long side at all costs. Since then, the stock has declined about 64%, so that call turned out to be an excellent one. (That said, we have to admit that we did not say the stock was a great short at that level. It was just a good level to take profits.)
Anyway, we do not cover the stock…and we realize that the “lock-up” period ends today…so we could see some more selling over the very-near-term. It’s also very difficult to address the technical condition of a stock after just six months of it going public. However, from what we CAN see on its chart, the technical condition has been reversed and it is now getting quite oversold. Again, we do not cover the stock, so we cannot talk about its fundamental condition. However, if you DO like it on a fundamental basis, it might be a good spot to dip one’s toe in the stock…as it’s technical condition (as best as we can measure it over such a short period of time) has reversed considerably over the past three months. (2nd chart below)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.