The fairly strong overbought of Jul. - Aug. has been wiped as the market continues to exhibit mild
corrective action. The uptrend line in force since Feb. of this year has been broken and this remains
a source of concern as is the negative controlling force of the 25 day m/a. The SPX has however
notched a double bottom this week and it remains to be seen whether it can rally more forcefully
off that 2125 level or whether further ground may be lost. Quick little swings in sentiment concerning
monetary policy for the remainder of 2016 appear to dominate the action. SPX Daily
My proxy for US business sales through Sep. rose a paltry 0.5% though pressure on earnings may be
subsiding as weakness in oil / gas comparisons should continue to grow more shallow. Output from
the mining / extraction / minerals sector was down a sizable 9.4% yr/yr despite modest improvement
in recent months, but pricing in this sector is less awful.
Capacity utilization in the US. is only 75.4%, unheard of in the modern era for an economy that has
been expanding for seven years and the data has to be unnerving to the Fed.
Long Treasury Yield ($TYX)
The long T-bond yield has swung up since early July probably mainly on talk of eventual Fed
tightening. Note as well that the yr/yr % change in CPI inflation has continued to inch ahead with
Sep. standing at 1.5%. Under the most charitable conditions, the long term yield premium spread
of the Treas. vs the CPI would dictate a 3.5% T-bond yield presently. Continued very low real
growth of the economy and large capacity slack has been keeping the yield near historically
low levels. $TYX Weekly
The long Treasury was very overbought in early July and this position has eased very substantially
in recent months. Thus despite the talk of further monetary tightening and the slow push on
inflation, some traders may play on the long side and it will be informative to see if they push the
bond down enough to reverse its uptrend.
The bottom panel of chart shows the relative strength of the stock market vs the long Treasury.
Note that since QE 3 ended as 2104 ran out, The bond has done about as well as the stock market
on a price basis as bond players correctly gauged that elimination of QE programs would suppress
economic growth and that the blowout in the oil price would contain inflation.
With peak seasonal driving for the year having past, oil has entered a period when the price can
be seasonally very weak right into early Feb. of the succeeding year. Net oil producers could
well hit another period when oil revenue inflows tumble unless they can convince the market
that a strong agreement to limit future oil output can be hammered out. Failing that, WTIC
crude could zip down from around the $50 bl. level right along to $35 - 40 by early this coming
Feb. $WTIC Crude
Note that oil has held its uptrend since Feb. of this year. So the test of producer credibility lies
dead ahead. A tumble in the price would further devastate the finances of net producers, probably
bother the SPX and could give the market for top quality bonds another reprieve.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!