Better Than a Kick in the Face

With equity prices down the past five sessions, it's probably safe to say that the market was ripe for a bounce.  Unfortunately, today's rally in the S&P 500 was more like a a hop rather than a bounce.  For the day, the index finished up 3.46 to 1,055.33 and well within the trading range we've seen over the past two months.  Given the speed and scale of the recent drop, I would have expected today's rally to have been much stronger than what actually materialized.  So much for investors bottom-fishing at these levels.  From the bull's perspective, though, the fact that the S&P opened lower and firmed throughout the session was an encouraging sign.  But as has been the case over the past few weeks, volume has been picking up on days when the market trades lower and contracting on those days when the market rally.  Today was a continuation of this trend yet again.  Perhaps the lack of follow through buying today is attributable to concerns about tomorrow's initial and continuing claims data?  Hard to know for sure.  From a technical standpoint, yesterday's chart gap remains unfilled and supportive of a move back up to the 1,067 level.  However, aside from this bit of near term technical positivity, momentum continues to look weak.

In a move that was somewhat sympathetic to the rally in the equity markets, Treasury yields took a break from their relentless move lower and actually backed up a bit today.  The 10-year Treasury yield now stands at 2.539% while the 30-year yield remains under 3.60%.  Surprisingly, though, the selling in Treasury bonds was somewhat greater in scale than that of equities.  This continues a trend I've observed over the past few months in which Treasury price movements have been much greater than those in equity.  For nearly as long as I can remember, Treasury prices moved at a snail's pace compared to their equity brethren.  The fact that this relationship has appeared to flip flop says to two things to me:  1) Treasuries continue to be the beneficiary of frenetic, somewhat irrational buying.  2)  Stocks, as an asset class, are more disdained than at any time over the past 30 years.  The contrarian in me looks at these developments and really wants to short Treasuries and pick up equity shares to take advantage of this 'dislocation'.  But given the challenges that abound in the domestic economy, it's hard to see that this relationship will reverse anytime soon.

Looking at gold, I have to admit that the price action so far this week has been downright impressive.  After trading down over 1% yesterday, the yellow metal actually managed to finish the session higher.  Especially when you consider the strong move gold has made over the past month, the fact that investors did not use the initially lower trade as an excuse to lighten up on positions suggests that gold has a fundamentally strong bid underlying it.  As I mentioned a few posts ago, I've been looking for gold to trade lower in a controlled fashion as a sign of continued strength.  Well, I got it, so I guess I have to officially put my concerns about gold to bed for now.  In terms of my conviction, I've now seen enough from gold to actually begin to consider it for my personal portfolio.  Right or wrong, gold is widely perceived as a safe harbor asset and will likely do well if/when the equity markets see a significant pullback.  And if I'm correct in my concerns for Q3 and Q4 this year, this could be enough to move gold through its highs and on to higher levels.  Unlike most positions, though, this is one that I will probably be using a trailing stop loss order for since price moves can be swift and dramatic.  To be sure, this increases my chances of getting stopped out, but in a market like this one I don't think I'll mind too much if this does happen.

Unfortunately, this will be my last post for this week.  I'm scheduled to travel to San Marcos on Friday and will be caught up in preparations for this travel tomorrow afternoon.  That said, I will still have Twitter at my disposal, so be sure to check for periodic updates from FT there.  If you haven't yet begun following FT on Twitter, you can find our feed at @FundTechBlog.  I hate be gone from the computer at such a critical time in the market's cycle (traders are about to come back and volumes are primed to pick up), but, perhaps this brief time away will give me the chance to develop some great topics for comment next week.  Until Monday.....