Up, up and away!

Up, up and away!  Stocks rose again in yesterday’s session after receiving positive economic news and the potential for a Canadian trade deal.  In fact, stock traders were really looking for excuses to buy yesterday as momentum and animal spirits were the real drivers in the positive move.  If you read my geek-out Wednesday description of Indices in yesterday’s note you will have found it to be apropos for the trade action that followed.  Digging into yesterday’s move, Information Technology, Consumer Discretionary, and Healthcare were the drivers of the rally. Those sectors are all growth-oriented sectors which typically outperform in periods of optimism and euphoria.  That said, they tend to lead markets into uncharted territory.  These stocks also dominate the growth oriented NASDAQ 100 index, which made new all time highs with the S&P500 and the Russell 2000 but outpaced them in growth.  As mentioned yesterday these types of moves describe the speculative nature of the trading session.  There are other ways to view trader sentiment and behavior, most notably on charts 1 and 16 on my attached daily chartbook. Chart 1 describes the trailing week sector returns and on it you will note that Information Technology and Consumer Discretionary took the top two spots.  Remember that when those sectors outperform, traders have been favoring more speculative and growth-oriented stocks which indicates positive investor sentiment.  Chart 16 shows growth versus defensive ratio, and on that chart you will note that the indicator continues to go up rapidly since hitting a low in the beginning of August indicating that growth stocks have been outperforming defensive since then. So the new highs that we are experiencing this month are largely attributed to the surging of more growth-oriented companies.  Of course, the economy doing well and good earnings are helping… generally speaking.  I added that caveat because I can cite many cases in which companies have come out with extraordinary earnings releases that beat all expectations only to trade down in the sessions that followed and vice versa.  Additionally, many economic releases that would have historically indicated potential roadblocks have resulted in stock rallies.  These are further signs that traders are in a speculative mood.  This type of behavior is typical of late cycle behavior which is largely dominated by this type of speculative behavior.

The S&P 500 hit new all time highs closing just below its session high and all time intraday high of 2916.  This uncharted territory for the large cap index will provide support at the round 2900 below (see chart 4 in my attached daily chartbook).  The Russell 2000 made an all time high close yesterday following on the index’s recent momentum.  It should be noted that while short term momentum has been strong, mid term momentum, which is a higher probability factor, has been slowing and trending negative implying a potential slow down ahead (see bottom panel of chart 7 in my attached daily chartbook).  Now on to the NASDAQ which, by now you must know, surged yesterday closing at its all time high reminding us that animal sprits and crowd psychology should not be tampered with.  Similar to the other indices making new highs, there is no high probability method for predicting upside potential but the index will get support below at 7500 (see chart 8 in my attached daily chartbook).  The Dow Jones Industrial average traded up yesterday but it still lags the other major indices giving us further insight into the sentiment of traders.  Bonds were volatile yesterday but ended the day virtually unchanged pausing in their recent attempt to find higher yields.  The 10 year starts the session at 2.86% and the 2/10 yield curve is at 20 basis points.  Bond traders will weight this morning's economic release of personal income and spending, which contains the Fed's favorite indicator for inflation.  The PCE (personal consumption expenditures) deflator and core PCE are expected to come in at 2.3% and 2.0% year over year respectively.  Of course, the top line personal income and spending will be factored in as well and they are both expected to show increases of +0.4%.  So a big number on a low volume day with markets at all time highs will certainly produce some volatility as traders keep their eyes open for signs of Kryptonite, because no one wants to see this flight cut short.

daily chartbook 2018-08-30