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The Low-Rates Syndrome - Why Are Stocks Rising?

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Prior to last week, the S&P 500 ($SPX) had spent several months vacillating between the May 2015 highs and the August 2015 lows. After numerous failed attempts at taking out the highs, the index was finally able to break through the massive technical resistance, as illustrated in chart 1 below. Meanwhile, this risk-on attitude is being expressed against a backdrop of a new record low in bond yields, which one would normally interpret as an expression of fear and economic unconfidence.


Chart 1 . $SPX - How an index often traces out a "W" pattern as it regains its rhythm.

Believe it or not, it's precisely the historically low interest rates that have precipitated this bullish breakout in stocks. An already precarious European economy was exacerbated by the BRexit event, as well as the prospect of other similar events (e.g. FRexit). These concerns boosted overseas inflows into U.S. Treasuries. Given the inverse relationship, as funds continue to flow in, rates continue to go lower. After all, historically low interest rates are still better than negative rates. 

Frustrated by low-to-negative bond yields across the world, investors are reluctantly pouring more money into stocks, hence pushing prices higher. Affectionately, this phenomenon has come to be known as TINA, or "There Is No Alternative." I call it the Low-Rates Syndrome.

S&P Technical Viewpoint

It's because of the aforementioned thesis that I remain long the stock market. Chart 2 below was published yesterday, shortly after the closing bell. Given the bullish price action during the Globex session, traders are likely to wake up today to the "squeak" of a new high.

As shown, I'm expecting a rush towards the 2183 area (S&P September contract, or ES U6), followed by a shallow pullback to the mid 2170's, and then a final more towards 2200.


Chart 2. S&P September contract - Short-term view.

Trade smart,

Peter 


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