Weekly Economic Update 02-17-2017

Over the last year, the value of the S&P 500 is growing at a rate six times faster than earnings. Earnings haven’t mattered much these past few years, but at some point, they will be relevant again and markets will adjust accordingly. Market bubbles usually invoke greed and the fear of missing out; this one is no exception as the S&P 500 is at its 2nd all-time highest valuation based on price-to-sales ratio.

10-year Treasury yields remain stuck between 2.4-2.6% range despite huge growth expectations, priced in fiscal stimulus, priced in Fed rate hikes, priced in tax cuts, surging bullish sentiment and inflation expectations. Just goes to show that if interest rates were headed significantly higher that any of that news should have rates moving above this range.

Client Update: I was very excited Thursday morning as it appeared on Wednesday that volatility (VIX) had bottomed, stock prices had peaked and Treasury yields held a critical horizontal trading band. Watching the market as I was getting ready to leave for work, I thought for sure today was our entry point and that there would be a long-awaited break out for gold and gold miners.

But it didn’t happen. While stocks didn’t set new highs, volatility moved back down. Rising volatility is a strong signal for the defensives such as gold and bonds. Both gold and gold miners are stuck in the descending part of a “bullish flag pattern” (Google for an image). Either prices will break the upper side of this channel or go down to retest the bottom, where the 21-day moving average happens to conveniently be.

With miners selling off on Friday it suggests prices will retest the lower end of the channel.

As far as Treasury yields go, as I mentioned they held a horizontal trading band. This is further evidence that yields have peaked and will eventually make their way down, which would be bullish for Treasury bond prices. There has been a trend of buying in the Treasury bonds, which is also a positive signal.  I am not ruling out another retest of that horizontal trading band, which is at 2.513% on the 10-year Treasury yield, but the trend is shifting from rising yields to falling yields.

All that to say, we haven’t gotten our signal to move in, but it remains at hand and I am ready to execute once we have confirmation on a break out or retest of the recent lows. From there I believe momentum will take over and move strongly in our favor.

Bonus Section: Industrial Production; Capacity Utilization; CPI index vs M2 Money Stock; CPI vs Average Hourly Earnings; S&P 500 volume analysis; support and momentum analysis for: 10-year Treasury yields and Gold Miners, and Treasury bonds; Treasury bond volume analysis; percentage of stocks trading above their moving averages; total put/call ratio; and charts from the recent Commitments of Traders report.

Weekly Update (4 min):

  • Inflation Up, Wages Down
  • Consumers Optimistic, But Not Spending
  • Consumers Optimistic, But Not Spending

Bonus (15 min):

  • Industrial Production YoY%
  • Capacity Utilization YoY%
  • Consumer Price Index vs M2 Money Stock vs Recessions
  • S&P 500 Volume Analysis
  • 10-Year Treasury Yield (TNX) Support Levels & Price Targets
  • Vaneck Vectors Gold Miners (GDX) Support Levels & Price Targets
  • iShares 7-10 Year Treasury Bond (IEF) Support Levels & Volume Analysis
  • S&P 500 vs % of S&P 500 Stocks Above 50-day MA
  • S&P 500 vs % of S&P 500 Stocks Above 200-day MA
  • S&P 500 vs Total Put/Call Ratio Relative to its 20-day MA
  • Commitments of Traders – S&P 500
  • Commitments of Traders – 10 Year Treasury Yield
  • Commitments of Traders – US Dollar
  • Commitments of Traders – VIX