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Thursday, February 1, 2018

Daily update 2/1 Has the interest rate environment changed?

I would call it a draw.

Some indexes were up and some were down.  The bulls and bears took turns today.  Both profit takers and dip buyers were active at different times.  SPX briefly traded below yesterday's low, but buyers stepped in immediately.  Breadth was -54%.  New highs were stable at 85.  New lows were also stable at 124.

The futures dipped below the lower channel line again, but failed to stay there.  The bounce idea from this area is still alive.  The futures are up again tonight probably on the AAPL earnings.  AAPL traded down initially, but is up over 3% now.  Of course the futures were up last night when I did the update, but were negative by the open.  If they hold up tonight and get off to a positive start tomorrow maybe the buyers will be able to keep the market up.

The red count crossed 50.  This is the highest it has been since last Aug.  It has been a long run with very little selling pressure. 

Stocks mounted a decent rally mid day then news of a big GDP upgrade hit.  That sent stocks and bonds down significantly.  Here is what the FED's GDPNow said today.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 5.4 percent on February 1, up from 4.2 percent on January 29. The forecast of real consumer spending growth increased from 3.1 percent to 4.0 percent after this morning's Manufacturing ISM Report On Business from the Institute for Supply Management, while the forecast of real private fixed-investment growth increased from 5.2 percent to 9.2 percent after the ISM report and this morning's construction spending release from the U.S. Census Bureau.

I have casually watched these estimates over the year and they usually start out high and work lower through the quarter.  I have never seen it start out this high though.  This could get some people to start worrying about the economy overheating and keep upward pressure on rates.  That could cause problems for stocks at these high valuations at some point.  I think a lot of this economic strength is from the massive amount of damage from last year's natural disasters.  It should be a benefit for the first half of this year at least.  Once that works through the system there will be a slow down.  That slow down combined with likely higher rates could end up being a problem.  We will have to see what happens in the latter half of the year.

The dip buyers are holding the market up here.  As long as they outlast the sellers the market will eventually head higher.  I thought the selling was winding down yesterday, but obviously that was wrong.  Maybe today was the end.  If the market was going to break down and head lower I think it would have done it today.  A close above today's high should get the rally going again.  A close below today's low could bring on more sellers. 

Some of the bond gurus proclaim the 30 year bond bull market is over.  Others have argued we will be in a low rate regime for a long time.  I don't even qualify as a neophyte when it comes to bonds, but I can read a chart.  Take a look at this monthly chart of the 5 year rate.

Back in 1986 the 50 MA (purple) crossed below the 100 MA (white).  In the following three decades the 50 has not crossed above the 100 with price still above both MAs until recently.  The 50 briefly crossed the 100 back in 2008, but price was already below both MAs.  This move up in rates is different then the other moves in the last 30 years.  The overall interest rate environment might be changing.  I don't think rates are necessarily going to trend higher right away.  They could just hang around in a range at the lows for a while.  I am pointing this out because it could be significant, but I am not knowledgeable enough in this area to know for sure.


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