On the macro front, a persistent dropping in Economic Surprises (echoing last year) makes it likely the stock market rally will soon pause or end, if it hasn’t already begun that process. However, we still don’t see a general set of extreme overbought/overbullish indicators in equities. If stocks continue to go up and surprises continue to decline, then a short will become more attractive, but I would be looking to other factors in assessing how attractive.
One such factor would be the potential resumption of debt worries to the fore. Spain is the only country looking likely to do this currently, with Portugal, Italy and Japan CDSs going the other way. But as can be seen from the Spain chart, previous highs are not that far off again. If this upward trend continues then it is likely to scrape at global bullish investor sentiment.
Another factor is China. Concerns over a slowdown are playing on commodities, and new orders surveys have produced mixed results. China doesn’t want to cut interest rates whilst maintaining that property needs cooling, but is more likely to cut bank reserve requirements again in April. Until evidence becomes more persuasive of China easing and/or China growth improving, this is another potential dampener on US equities sentiment.
Source: Danske Bank
For now then, investors, particularly in US stocks, remain unconcerned about economic surprises, Spanish debt and China slowing, but this is often how it works. The bull extends as negatives grow, only for a sudden collective shift in sentiment, with participants becoming of the view that the market has moved too far, too fast. Of course, if surprises start to improve again, Spain does something to ease CDS pressures or news from China gets better, then equities and pro-risk in general could yet advance further.
One other macro factor to mention is that the latest POMO schedule has been released and net sales begin April 9th. That may be another downward pressure factor, as per McClellan’s relationship chart between the two, that I previously posted. Countering this, the Bank of Japan added to stimulus last week.
A look at treasury yields and the dollar reveals a delicate position in both. 10 year yields completed their obvious move up to the s/r line shown, and now the question is whether they can penetrate and rise above that line, or whether that was just a counter trend rally. The Fed’s actions and words may have some influence in this, and the next FOMC is April 24/25.
The US dollar index is likely to break one way or the other soon. As per with treasuries, dovish or hawkish words or actions from the Fed are likely to play into this, but also the general macro factors listed above, and their pro/anti risk connotations.
Gold and miners remain overbearish and should therefore likely soon take off. Soft commodities rallied on Friday as inventory reports revealed steeper drops than expected for corn and others, but broadly speaking commodities are languishing versus equities, so we likely need a confluence of factors to bring about sustained strong gains.
There will be no posts or model updates now until 11 April, as I am away on holidays, and taking a proper break from the markets. I will respond to mails/comments on my return.