We are now at the September quarter-end, normally a volatile time for stocks. Expect selling pressure to increase over the next few weeks as investment managers sell off poor-performing stocks. Increased cash balances then enable them to take advantage of new opportunities as they present themselves. If the fundamental under-pinning of the market is sound, the market is likely to undergo a minor dip before resuming its advance. If not, and there are serious flaws, the sell-off could turn into a rout — as in 1987 and 2007.
At present the market appears sound, with none of our market indicators flagging elevated risk, and the bull market is likely to continue.
Bears cite the potential for an increase in US interest rates as a major threat to the US economy. The track record for the last 15 years suggests otherwise. The graph below compares percentage change in 10-year Treasury yields to the Wilshire 5000 Total Market Index (divided by 20 for purposes of comparison). The two tend to rise and fall in sync, with a 20% to 40% rise in the index accompanying a 1% increase in yields.
The Fed tends to be conservative about raising interest rates (“doves” outnumber “hawks”) and is unlikely to raise rates until there is solid evidence of a recovery. So a rise in interest rates is more likely to be followed by a surge in stocks than a fall.
US stocks
The S&P 500 found significant support at 1965, the lower border of the broadening wedge. Monday’s long tail flags (short-term) buying pressure. Follow-through above 1990 would suggest a rally to test the upper border. Breach of 1965, however would indicate another correction. Decline of 21-day Twiggs Money Flow below zero would confirm, while recovery above its September high would suggest that buyers are back in control.
* Target calculation: 2000 + ( 2000 – 1900 ) = 2100
CBOE Volatility Index (VIX) is rising, but the low level continues to suggest a bull market.
Dow Jones Industrial Average found support at 16950 on the weekly chart. Long tails again flag buying pressure. Recovery above 17150 would suggest another advance, while follow-through above 17350 would confirm. Breach of support at 16950 is unlikely, but would warn of a correction. 13-Week Twiggs Money Flow reflects some hesitancy, but the long-term picture is bullish.
* Target calculation: 16500 + ( 16500 – 15500 ) = 17500
Thanks for your comments on US interest rates and stocks. It would be good to see a comparison of 10-year Treasury yields to the Wilshire 5000 Total Market Index for 1994 if you have the data.
Stocks went sideways in 1994. Wilshire shows zero growth. If you are looking for the last time that stocks fell while yields rose, that would be 1990.
Thanks Colin. Bonds and equities look inversely related between 1990-1995 compared to the more correlated 2000-2014 period.
Interest rates and market: The stock market anticipates, so adjust it for leading nature and you see a more definite inverse correlation (as one may rationally expect, = lower present values with higher discount/interest rates); eg 2009 stockmarket rise in advance of subsequent interest rate fall.
If the stock market anticipates interest rate rises, surely the bond market would to?
….Also don’t confuse a fall to low growth, between 0 and 1 (0 to 20% actual growth), with a bear market where there is negative growth.