Higher and Higher

The stock market has bypassed the historically weakest month on the calendar and continues to move higher on
extreme levels of optimism. These levels of optimism are normally accompanied by some kind of top as investors feel as though, “nothing bad can happen”.

The weakness over the summer that we saw in the industrials and the small cap stocks that foreshadowed a near-term correction have reversed course. If the market leaders like Apple and Facebook regain their strength then it will be hard to find much wrong with the broader indices (except their price:). We get the Fed minutes on Wednesday so maybe that gets the NASDAQ, Russell 2000, DOW and S&P 500 to synch-up so there are no longer any divergences among the indices. That would certainly add some mojo to the stock market.


As you can see from this chart above from Elliott Wave International, speculators have piled into the DOW as evidenced by the number of contracts on the right scale. Speculators often make the mistake of piling in at the END of a trend advance and we are seeing a record number make this bet on the DOW. How long will it last? I actually don’t know but I do know these situations go longer than anybody expects.

Here is some more evidence with regards to volatility which is measured by the “VIX” or volatility index. Volatility spikes when prices fall in the stock market (vice versa). Speculative accounts continue to hold record-size bets against VIX futures which means they don’t anticipate any fall in the stock market. The chart below goes back to 2008 and shows you the number of contracts betting the VIX will fall (stock prices will continue to rise).


When this crowded trade unwinds you will see a lot of people lose money very quickly. These two charts tell the same story that speculation is very high at these prices. That being said, I wouldn’t want to bet against the stock market until there is evidence of a trend change but just be aware of what is going on “under the hood” if we continue to advance in the coming weeks.


Economic & Central Banking Snippets

  • The September ISM Manufacturing index came in stronger than expected with a two point increase to 60.8. The strong ISM results follow a run of strong regional Fed manufacturing surveys released over the past few weeks, with the NY, Philly, Richmond, Dallas, and KC Fed surveys all stronger on an ISM-weighted basis. (Morgan Stanley)
  • US vehicle sales surged last month, exceeding economists’ forecasts. (WSJ)


  • The September employment report came in weaker than expected, with payrolls down 33,000 (vs consensus of +80,000). The unemployment rate fell to 4.2% as a strong 906,000 gain in employment in the household survey was enough to offset a 575,000 increase in the labor force that lifted the participation rate to 63.1%, a high since March 2014. (Morgan Stanley)
  • The effects of the hurricanes on this month’s employment report were evident in the details of the household survey, where 1.5 million workers reported that they were not at work in September due to bad weather. That’s more than we saw after Hurricanes Katrina and Sandy and is the second largest reading in the 40-year history of the data, surpassed only by the January 1996 blizzard.


Chart Time!

S&P 500 (SPY)


Dow Jones (DIA)




Russell 2000 – Small Caps (IWM ETF)


Market Snippets

  • Fitch has downgraded Wells Fargo’s credit rating to its lowest level since 1996, citing shortcomings in the US bank’s “risk controls”. The credit ratings agency said on Tuesday it had cut the rating by one notch from AA- to A+, citing “several notable missteps in the company’s risk controls”.
  • Tesla’s efforts to ramp up production of its all-important Model 3 are off to a slow start. The US electric carmaker said on Monday that it had produced only 260 of the new vehicles in the third quarter — well below the target of “above 1,500” that Elon Musk, chief executive, had earlier said he expected for the month of September alone.
  • Alphabet Inc (GOOGL)’s YouTube is set to use the 2017 MLB World Series as the platform for its first national advertising campaign. The campaign will promote its new skinny bundle package YouTube TV.
  • The National Football League believes it can establish a team in London by 2023. The organization has been testing the concept for years. (FT)
  • Investment-grade corporate spreads continue to tighten. Below is the corporate bond index spread followed by the IG CDX spread (index of credit default swaps for investment grade bonds). (WSJ)


  • A Senate panel approved a self-driving car bill that creates a national framework of regulations for the industry. The bill includes amendments covering cybersecurity issues and allows automakers to sell up to 80K self-driving vehicles annually if safety standards are met. Self-driving commercial trucks aren’t included in the legislation. It’s been a busy week on the autonomous vehicle front in general, with Ford mapping its strategy to funnel investments into self-driving cars and General Motors tipping off that its Cruise Automation business is making “rapid progress” on fully autonomous driving capabilities.


International Snippets

  • National Bank of Greece has hired banks to launch a covered bond, in a deal that would mark the return of the country’s financial sector to international capital markets. The Greek banking sector has not tapped international capital markets since 2014, when a series of lenders sold senior debt.
  • Ireland has sold its first ever bond with a coupon of 0%! That means that Ireland is effectively being paid to borrow €4bn over five years. The country brought in more than €10B of orders for the debt, which matures in 2022. The bond, which is priced slightly above par, came at a yield of minus 0.008%. The absence of the coupon means Ireland will not have to make any interest payments on the bond, which will mature at a slightly lower value than that at which it was sold. Investors who hold the debt to maturity are guaranteed to lose money.
  • Swathes of European sovereign debt have been trading at negative yields over recent years, with historically low rates and more than €1.7T of government bond purchases from the European Central Bank forcing asset prices higher. The German five year bond is currently trading at minus 28 basis points. Both Finland and Austria have this year issued bonds with zero coupons.

Paul McCarthy

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