Two weeks ago Brexit created significant global stock market volatility with massive investor selling dropping world equity values by trillions. Last night European stocks rallied closing higher with the FTSE (British) up 1.4%, DAX (Germany) +2.12%, and CAC 40 (French) +1.76%. On Monday, the US indices followed the overnight trading with the DJIA closing +0.44 %, SP 500 + 0.33%, and NASDAQ + 0.64%.
The significance of Monday’s rally was the SP 500 broke through a 14-month resistance at 2130 reached on May 20, 2015 and closing at record level of 2137.15. Monday, the index blasted past this key resistance and puts the market in again the challenge of moving forward to higher highs or selling off. As illustrated in the below chart, for the past 15 months every time the SP 500 has cycled close to 2130 and above the 50 day moving average (orange line) it sold off. In February the selloff dropped the SP 500 to mulit-year lows.
The timing of this rally is perplexing with all the unresolved uncertainties investors are facing and at the beginning of US corporate earnings season. Analysts are not optimistic for a reversal of declining SP 500 corporate earnings which have had quarter over quarter declines since June 30 2015. At the same time investors are pouring money into safe haven US treasuries plummeting the 10-year treasury yields to lowest interest rates in recorded history to 1.34%. Typically yields rise with the stock market to retain the attractiveness of owning bonds over potential better returns of riskier equities. Today the 10 Year Treasury yield did close at 1.432% but still over 30% lower than 2.25% yields of last year.
WHAT DOES THIS MEAN TO ME?
We are encouraged by the technical breakthrough of the SP 500 but remain cautious. It is impressive how investors have reversed course of selling to buying in such short order. Stock markets rallying today would indicate that investors are regaining their risk appetite and forecasting resolutions in many areas that have been plaguing economic growth for the past eight years both in the US and globally. It will be important to monitor corporate earnings reports over the next several weeks to determine if indeed economic conditions are improving for a more profitable stock market environment.