S&P 400 Hits A Record High

Another Rally- Stocks Are On Fire

On Friday stocks had an across the board rally as all major indexes went up. The S&P 400, which is a mid cap index, hit an all-time high as it was up 0.5%. The S&P 500 outperformed the Nasdaq and Russell 2000 as it was up 0.31%. The S&P 500 was up 1.62% this week and is now up 3.94% on the year. It’s now just a few points away from the high made in March. It’s also only down 3.3% from the all-time high. While I tend to get more bearish as stocks rally, I think there will be great follow-through after the market makes a new record high. The great economic data, earnings data, and market breadth make me confident that this won’t be a double top. We’re close to my vision where the market rallies on the North Korean summit and it breaks new record highs.

Credit Markets Weaken

I mentioned previously that the financials and the consumer staples have been underperforming. On Thursday the financials had a great day and on Friday the consumer staples did well. The consumer staples were the best performing sector as they were up 1.3%. Even though the stock market was up, the CNN Fear and Greed index stayed at 62.

The chart below shows the equity market compared to the credit market. The recent volatility in Brazil hurt credit more than equities. The Brazilian index slipped further as it was down 1.24% on Friday. This is a big shift in sentiment as it was in a strong uptrend since January 2016. The dollar index was up 12 cents on Friday to $93.56. It’s interesting to see emerging markets falter even as the dollar’s modest rally has tapered off. The dollar index is only up $1.02 to $93.56 in the past month. The weakness in the past week has certainly helped the S&P 500.

(Click on image to enlarge)

Curve Steepens

Even though the credit market has seen selling off this week, indicating ‘risk off’, the U.S. treasury market saw yields increase, indicating ‘risk on’ just like stocks. The 10 year yield increased 2.57 basis points to 2.95%. The best case scenario for the 10 year yield would be for it to increase modestly. Increasing too much would cause riskier bond yields to rise, potentially causing borrowing to decrease. If the yield falls, the curve will invert. It’s doubtful the 10 year treasury yield will rally too much because capital will come out of international bonds with lower yields and into the 10 year treasury, pushing its yield lower. Higher growth should push up yields slightly like we’ve seen.

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