Weekly Observations for 5/18/2018 — Market and Rates Breakout

For this week’s observations, I’d like to give you a very brief update on both the US stock market and interest rates, since there have been some interesting movements in each over the past two weeks.

The US stock market, depending on which line you prefer, has either decisively broken out from the tightening range I have been highlighting for months (blue line) or is just thinking about it (green line).

Either way, the important take away is that the 200-day moving average support line (red) has continued to hold up during this consolidation period. Theoretically, such a support line should be completely irrelevant — but in today’s world of algorithmic trading and the wide-spread use of momentum and risk-parity strategies, which enter and exit the market based on prices above and below certain levels, these technical price indicators are worth monitoring.

I highlighted the year-to-date significant increase in interest rates in my May 4th observations. Over the last two weeks, rates moved considerably higher yet again, reaching 3.10% on the 10-year Treasury.

The yield on even short-term Treasuries has now surpassed the dividend yield on the S&P 500 for the first time since 2008. If an essentially risk-free interest rate pays more than the yield on high-risk stocks, it is possible that investors will decide to shift assets back into these more conservative instruments. And as I highlighted on May 4th, the pundits have insisted all year that rates above 3% would be a catalyst for stocks to decline. With rates at 3.1% and stocks holding steady for now, we’ll see how the narrative changes.