Market Brief – Thursday 5/16/19

When markets don’t sell off on bad economic news, investors take this as a bullish hint from Wall Street that the recent economic data is transitory. As a result, investors tend to buy stocks when markets are bullish. The lack of selling the other day can be considered a clue from Wall Street that the worst is behind us, or it is a trap to lure more investors into bidding stock prices higher.

Treasury yields did rise after failing to break below its March lows in overnight trading, but the ensuing rally in yields was very weak. Buyers stepped in as yields crossed back over 2.4% which is still below the Federal Funds rate of 2.5%.

Housing Starts rebounded +5.7% MoM in April and were also boosted by a positive revision for March. Building permits rose +0.6% MoM in April and also experienced a positive revision for March. On an annualized basis, housing starts just saw their seventh consecutive monthly decline.

Stocks jumped out of the gate on weak volume hoping to attract buyers, but as we have seen over the past fifteen months, there aren’t many buyers at this price level. The reason you know stock prices are more likely near a high than a bottom is based on how much buyers are willing to pay to own the market. Clearly, there aren’t many who want to buy at this price level.

Treasury yields faded their early gains but still closed slightly higher. Ten-year Treasury yields closed just under 2.4% and are looking to resest their March lows again.

Part of the reason stock prices have been rising against weakening economic data is due to speculative option contract buying. There are a large number of option contracts with strike prices above the current market level, which means for those contracts to pay off, the stock market needs to be at or above that price level when the option contracts expire tomorrow. To protect their investment, deep-pocketed traders will bid the market higher, which is likely what is happening now.

Silver mining stocks are flirting with their 2+ year lows, which if broken, suggest prices are headed back to their 2015-16 lows. For those keeping scores, the 2015-16 bottom in the broad mining sector saw investors doubling their money less than a year later.