A truly macro approach is needed to derive some sense out of the market's action recently. Treasuries have shown great strength even in the face of higher equities; this somewhat compromises the move itself. However, a developing trend is that of 10 year yields (IEF) outpacing US equities (SPY). I use an equal weighted index of equities (RSP) in order to show the true nature of the trend. As seen below, in early August the indicator broke out to the upside. This is very bullish for stocks and hints that a downside barrier has at least been put in place by stimulus speculation. Another way of looking at this is by saying the height of the VIX (VXX) has been capped. Traders seem to believe that even if central banks don't act soon, in the case of a tail risk event, they will act.
A few good indicators to look at to measure market strength are the NYSE breadth indicators. The first one is that of Advance-Decline Volume vs. Total Volume. Volumes have been a huge issue in equities lately for various factors. The awaiting of both ECB and Fed action for late August/early September, and equities reaching 52 week high levels have put a lot of money on the sidelines. The indicator below looks to be pushing for an upward breakout, but a major catalyst must be put in place before the move is credible.
The next indicator is that of strictly Advance-Decline vs. Total ActiveIssues. This removes the volume aspect and shows what the markets are doing with exaggerated oscillations. With less money on the table, prices are free to move in an exaggerated fashion. This seems to be the case here, nonetheless, there seems to be an upside breakout. This looks to be another reiteration of equity strength.
A turn back into the debt market shows the strength of junk corporate bonds (JNK) vs. 10 year notes. The strengthening of the economic climate leads to junk outperformance. As seen below, junk has led in the previous rally and looks to be hitting a point of resistance. This makes sense considering the hold till September. A break higher would be another bullish sign for the markets.
A bear indicator exists when Utilities outperform the broader market. This is not the case currently, considering Utility stocks (XLU) look to be primed for a breakdown. They oscillated through the previous rally with uncertainty. Yet, at a point of consolidation, their breakdown could signal new found strength.
The last chart is that of gold (GLD) vs. corporate debt (CORP). Both are seen to show strength during periods of inflation, such as when central banks stimulate economies. They are somewhat seen as substitutes, but due to the debt properties of corporates, commodities offer a stronger inflationary case. When gold can outperform corporates, it usually signals a developing bullish run for gold and inflation hedged securities. The chart below shows a slight bottoming and even a break above the down trend line. Considering the conviction of belief that either the People's Bank of China, ECB, or Fed will act soon, inflationary expectations make sense. The indicators show growing belief in risk on strength, and to avoid another run up on the side lines, many may jump in on the next catalyst.
