Rally Continues

Psychology during bear market rallies seems to follow a fairly consistent pattern. “During secondary reactions [upward] in bear markets,” wrote DOW Theorist Robert Rhea in the 1930’s, “it is a fairly uniform experience for traders and market experts to become very bullish.”

S&P 500
S&P 500

The U.S. markets moved higher over the past week right up until 2pm on Friday afternoon. As you can see from the chart above, the S&P 500 rose right up into the resistance points I highlighted in last week’s market update. At this point, there are technical indicators showing the market is very overbought and ripe for a pullback. Its possible the SPY ETF can fill a gap in the chart and move to $204 but there is a lot of overhead resistance. Volume has also been declining as the market has moved higher which shows a low level of conviction at higher prices.

Below is a graphic showing we have not been this overbought in years:


Market Snippets

  • Moody’s cut the credit ratings of six offshore oil drillers on Monday, expecting the group to face an extremely challenging operating environment through at least 2018.
  • Moody’s changed their outlook on China’s credit rating from stable to negative, citing a weakening of fiscal metrics and a continuing fall in foreign exchange reserves. Moody’s current rating is Aa3 on China.
  • The U.S. government has announced tariffs of 266% on steel imports from China, with goods from Brazil, India, South Korea, Russia, Japan and the U.K. subject to smaller duties. It is the second time since December that the Commerce Department has penalized foreign steel producers, including Chinese mills, for selling steel in the U.S. at unfairly low prices.
  • Dividends and stock buybacks in 2015 topped $1 trillion for the first time according to S&P Capital IQ Global Markets Intelligence. The previous all=time high in stock buybacks occurred in 2008 at the previous peak. See the graphic below.
Net buybacks
  • The U.S. Treasury 10s-2s spread has actually compressed -4bps over the past three weeks and by -14bps over the past month. At 100bps wide, it’s the narrowest it’s been since late-2007 (WSJ).
  • Since 1900, there have been 27 instances of EPS declines over a 2-quarter period. Historically speaking, such a rate of decline has coincided with a recession 81% of the time. The remaining 19% of the time, earnings reaccelerated for a short period due to short-term stimulus (either fiscal or monetary) which only temporarily delayed the onset of a recession. We are currently in one of these periods.


The jobs numbers were released on Friday and they were better than expected. However, the jobs data has a lot to be desired as seen in the following charts. The first chart shows the recovery in jobs since the financial crisis. The second chart below shows that low-wage jobs have been responsible for this recovery.

Breadwinner economy
Bread and circuses economy

That is it for this week. I’ll address the commodities markets in more depth next week (oil, silver & gold).

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.