Friday's rally was also the result of playing "catch up" with the rest of the globe after the brief hiatus of July 4th. On Thursday, the ECB (European Central Bank) signaled continued monetary accommodation with the strongest language that Mario Draghi has used since his "whatever it takes" statement in 2012. Draghi had to do some serious "jawboning" as his hand is being forced. A strong positive correlation between US and global interest rates emerged after the Bernanke news conference on 6/19 as global yields followed US yields higher. Europe can ill afford higher interest rates at this time as they can be likened to a drowning man trying to keep his head above water.
Technically, the charts of the major indexes are speaking to a resumption of the rally as significant resistance has been breached in a number of indexes. Small caps have also resumed leadership in the advance which is a bullish short to intermediate term indicator.
Most importantly, Friday's price action in stocks and treasuries strongly suggests that the market is ready to take off the "training wheels" its been riding with since the onset of the Fed's unprecedented QE policy.
Before I get too far into the commentary I want to address a call I made earlier in the week here (http://equitymaven.blogspot.com/2013/07/europe-recovering-commodities-making.html ). While I did say that the call I made might be early I still made it and it does appear at this time that my call was incorrect.
I'd like to qualify my position. First of all, lumping the precious metals with industrial commodities was a mistake. It's not that there couldn't be a positive correlation but the environment at this time does not lend itself to such a correlation. For instance, Gold and industrial metals can and will weaken in a disinflationary or deflationary environment but in a situation where interest rates are rising in a disinflationary environment Gold and Copper cannot be positively correlated. Rising interest rates normally are predictive of expanding economic activity in the early stages of an economic cycle and would be good for industrial metals. Rising interest rates are the bane of precious metals unless those interest rates are skyrocketing (ie. 1979).
Secondly, the "pop" we saw in industrial commodities last week coincident with bottoming Euro zone economic data was not necessarily a wrong call at the time if Europe is actually bottoming. But the situation in China is worsening and this has been a drag on the entire commodity complex.
I'll be addressing this state of affairs below in my analysis but regular readers know I've been identifying this "disconnect" in global financial markets and we're seeing "a tale of two economies", that being the US economy and the rest of the global economy. Or, are we seeing a tale of the US financial markets and the rest of the global economy? And how can long term interest rates be rising if industrial metals are still treading water?
But first, let's look at our markets. I'm going to start with the Russell 2000 small cap index:
SPY (S&P 500 SPDRs) also penetrated a resistance gap I identified here on a 60 minute
chart (http://equitymaven.blogspot.com/2013/06/spy-enters-gap.html ):
Ten Year Note yield down - stocks up
NOTHING IN THIS COMMENTARY SHOULD BE CONSTRUED AS AN OFFER OR ADVICE TO BUY OR SELL ANY SECURITIES, OPTIONS, FUTURES OR COMMODITIES. THE OPINIONS ARTICULATED ARE ONLY THIS AUTHOR'S WHO IS NOT A REGISTERED INVESTMENT ADVISOR OR BROKER.