Yellen's speech certainly didn't disappoint, serving as a catalyst for an explosion in volatility in several asset classes after the last few days of lackluster, below average holiday trading. Whether or not Yellen sticking to her guns in advocating slow rate hikes, vs siding with the regional Fed Presidents (four of which just last week advocated possible April meeting hikes), is any ground for further confusion in the economy, is without a doubt a problem. Can GDP downward revisions (Atlanta) and earnings season shortfalls continue to be ignored, in favor of bullish job growth with an economy at near full employment? All while the US continues to buck the trend of global monetary accommodation in undertaking its policy normalization at a pace which might be far too quick for comfort given the global growth woes of late. The real question now is.. which of these moves we saw today was real, and which should reverse course in the days ahead? The S&P took the "Kick the Can" approach in its "policy reaction" by immediately accelerating higher by 1%, thrusting up to new daily closing highs for 2016, with Small-caps leading the charge. Despite the prior strong correlation between S&P and WTI Crude along with USDJPY and TNX, S&P ignored this weakness and gained ground, where the latter three all moved lower. By the close, US large cap equities closed higher by nearly 1% on the day with the NASDAQ up more than double that amount and the Russell 2k closing higher by nearly 3%, a huge one-day period of outperformance. Bottom line, while various technical issues remain, the act of moving back to new high territory can't be ignored, or used as a chance to sell, until we see price reverse in a more meaningful fashion.
Overall, it seems important to highlight the following: Treasury yields, Equities, and Crude Oil have all suffered a gradual slowdown in momentum in recent weeks, which is significant given the extent to which all have correlated positively of late. Even on the miraculous snapback in equities Tuesday back to new monthly highs, momentum and breadth are in worse shape, not better. While not immediately bearish on a move back to new highs, the rally is to be viewed with more skepticism at this point until we can see some type of meaningful consolidation.
The fact that Industrials, and Healthcare have begun to participate in the last week is a real positive, while the Technology surge is also meaningful, and constructive for the market. Yet it's always been wrong in the last year to attempt to follow breakouts to new highs in equities that aren't coincided by similar strength in WTI Crude oil, Dollar/Yen, and by Treasury yields. While this doesn't necessarily spell doom for Tuesday's move, it certainly makes it a bit more suspicious in the near-term.
A few things to mention:
Stocks and bonds generally have not trended together for some time, at least over the last 12 months- When the two have begun to move in tandem, it's typically been bonds that have been right, while stocks reversed course.
Financials weakness overall is definitely a concern for the participation aspect of the rally at this juncture. The move back to new highs certainly will lack the breadth and momentum followthrough, and now with a key leading group like Financials lagging even further (Comprises 15% of SPX), it leads to a weaker rally from here on out.
SPX, NASDAQ Comp and DJIA all made new daily high closes for 2016. While breadth isn't following this move to new highs, nor momentum just yet, as indicators like MACD were set to make bearish crossovers, which now potentially could be averted with MACD now "kissing" the signal line as opposed to making a firm bearish crossover. Overall, despite the momentum concerns, and quality issues, it remains difficult to sell into this move right away, and stops were closed out for those attempting to play pullbacks on the move back to new monthly highs.
The US Dollar decline looks meaningful vs Yen, Euro and Pound Sterling, and DXY looks could very easily slide down to test prior lows from 2015, which should be a boon to commodities and in particular Precious metals.
WTI Crude's decline reversed course intra-day to hold prior lows just above 38.25, and has since attempted to rally in overnight trading. Similar to S&P, this has still suffered some real momentum deterioration and a trendline break in the last week. Even if prices were to move back to new highs, the strength of the rally would be called into question, and rallies would be vulnerable to reversing course into April.