The Federal Reserve is implementing a multi-year interest rate increase plan as a way to manage inflation. Many bull markets have ended as a result of the Federal Reserve raising rates too much.
As long as the 10-year U.S. treasury rate is below 5%, rising interest rates have a positive correlation with a rising S&P 500. Said simply, rates go up and stocks go up. Above 5%, rising rates have a negative correlation with the direction of the S&P 500. Today, the 10-year treasury is about 2.9% — shown with vertical blue dashed line on chart below.
The Federal Reserve attempts to manage inflation (Fed target rate of inflation is 2% year-over-year) through interest rates. By raising interest rates, the Fed can slow economic activity. Borrowing (e.g., for a home or any other purpose) becomes more expensive. Saving and earning interest becomes more attractive. Consumption moderates relieving upward pressure on prices (inflation).
The Fed Funds rate is currently about 1.4%. The Fed says it plans to raise the Fed Funds rate to about 2.7% in 2019. The current spread between the Fed Funds rate and the 10-year treasury rate is about 1.5%. If we assume the spread remains constant going forward, the 2019 10-year treasury rate using the Federal Reserve’s projection of the Fed Funds rate is 4.2%. Based on market relationships dating back 55 years to 1963, interest rates rising should not be a major threat to the bull trend this year.
The 17 consecutive month of positive Leading Economic Index (LEI) percent change month over month was reported this week at plus 1% for January. The LEI continues to signal growth through the first half of 2018.
Source of the entire article is delta market sentiment news
Leading indicators for December were stronger than expected, up 0.6% vs. views for 0.5%.
The Kansas City Fed’s manufacturing index hit 16 vs. estimates for 14. Positive readings point to growth, while a rating of zero is neutral.
Good for the market !
Source : delta market sentiment indicator and IBD
I would like to thank Helga Sweeney and Alex for their observations on “pesky charts”
what about supply and demand for NASDAQ? or for that matter DOW and S&P ?
Before i answer that – lets look at some basic fundamental traits in the charts for 2017 and till now 2018
what did the pundits say – This is a valid dictum – Do opposite what the pundits say and you will be alright !!
look at what IBD said “Since 1963, the S&P 500 delivered 19 years in which it rallied more than 15%. But each year following those big gains averaged a more modest 7.5% advance.” and “investment strategists and fund managers expect more modest stock price gains in 2018.”
I respect IBD a lot; In fact the big picture column is fantastic and is a daily read for me to gauge the “Big Money flow”- which is nothing but this : How is the price performing wrt the volume on a daily basis. How are leading stocks like YY, AMZN and others performing? For we know that with first signs of big selling the leading stocks lose first and then the volume increases to overall stock market as it falls.
NASDAQ’s number of distributions days (high volume selling) is just 1 in the last 30 days and It is up 7.3 % till Jan 22nd 2018! we haven’t even finished one month yet!
The S&P 500’s 2017 return was more than double the big-cap bogey’s 8.50% average annual gain over the past 10 years. The Nasdaq composite index shot up 29.64% and the DOW jones gained 25.08%!
Only once in the lasts 25 YEARS the S&P is up more than 6 % in Jan (1997 – 6.7%). the S&P just hit 6.00 % just yesterday !!
the delta market sentiment indicator is approaching 74% (74 % of around 2500 stocks are above they mid term moving average)
the leading economic indicators (LEI) is healthily positive last one year
the stock market is healthy and going strong with no head winds at all
For the first time since almost 30 years – the entire world is seeing +positive grown for 12 months!
Of the top ten largest corporations in the world in 2009, only one was a technology company – Microsoft. Today, seven of the ten largest companies worldwide are technology companies including Apple, Google/Alphabet, Microsoft, Facebook, Amazon, Alibaba and Tencent. The shift to a technology dominated economy provides a boost to earnings growth rates.
Over a fifth of the S&P 500 is represented by the technology sector. Consensus revenue growth for the technology sector in 2018 is 9.4% which should drive 35% earnings growth. In the past month, the revenue growth forecast was revised up from 8.7% to the current 9.4%.
The earnings per share for the MSCI AC World Index (ACWI) is above $30. In the U.S., the S&P 500 consensus earnings estimate is expected to advance by about 11% year-over-year on revenue growth of about 5% off of record levels reached in 2017.
If the P/E remains constant as it has for the past two years, the S&P 500 should be up in-line with earnings or about 11%.
Source : Delta market sentiment
this year there has been over 60 times that NASDAQ hit high.
this week begins with 6th week of record high.
above is a weekly close for QLD.
QLD which is 2X Nasdaq 100 appears to have hit a plateau 2 weeks in a row 10/16 and then last few days.
last 4 trading sessions NASDAQ hit 3 distribution days – which is concerning.
On 5/29 week QLD closed 62.65, where as the MA 20 Weeks was 53.67 – 8.98 dollars difference! about 14 %. Then it dropped by 6.3 dollars (around 10%)
The situtation is not that bad now – the difference between the two (MA and the price ) is about 4 %
Now for the current scenario – the ATR 20 DAYS is 2.43.
So lets wait and see. No clear sell as yet
The Misery Index is 5.5% today. Historically, when the Misery Index has been this low, the S&P 500 P/E has ranged from about 15x to 35x with many instances of 25x and above. The all-time low of the Misery Index from 1960 through September 2017 was February 1966 at 5.28%. The all-time high was in 1975 at 18.56%.
A year ago, the Misery Index was 6.74%. The index is down roughly -18% in the past twelve months and the S&P 500 is up 21%. For now, the index is low and continues to decline which is constructive for further stock price advances. In the coming months, it will be interesting to see if the Misery Index is able to drop to new all-time lows.
Source : delta market sentiment