Market Brief – Monday 10/1/18

U.S. equity futures flashed green on the news a trilateral trade deal between the U.S., Mexico, and Canada has been reached. While stocks are excited over this news, stocks did not sell off when President Trump sought to renegotiate NAFTA, so news of a renegotiated deal shouldn’t have much impact. Also, the changes in this new trade agreement were minor, so there seems to be quite a bit of excitement over some small changes. Keep in mind that all trade deals must be approved by Congress.

The excitement over this potential trade deal speaks to the bullishness of the U.S. stock market, which wants to rise regardless of the news. Experts continue to indicate there is one final surge left for stocks, called a blow-off top, which is when retail investors pile into stocks to allow large money managers the ability to exit.

Yet in a brokerage allocation report released by Charles Schwab this weekend, Schwab reported retail brokerage cash levels were at their record low as retail investors are fully invested. With retail investors, institutional investors, and hedge-fund managers all-in stocks, the last buyers are corporations purchasing their stocks back. While it is possible there will be a blow-off top, the Fed’s monetary tightening has kept the stock market largely in check all year. With the Fed set to accelerate their tightening starting this month, it will take a flood of money flowing into stocks to create this final move higher. Where that money will come from, remains a bit of a mystery.

Stocks closed higher on the day but faded their early gains. Small-caps and bank stocks were both down for the day. Speculators came in strongly on Friday to short Treasuries and followed through again on Monday. Despite the largest speculative short positioning against the Treasury market, ten-year Treasury yields will not budge over 3.1%. Clearly, bond sellers are exhausted which leaves the door wide open for a major reversal in yields.

Agricultural commodities saw buyers move in and volumes jump today. This is an indication a bottom may be in place and that agricultural commodity prices are about to start rising.