The general equity market continues to breach new record highs with volatility being subdued. Euphoria remains elevated with multiple sentiment indicators breaking new yearly highs. For example,
Figure 1: Phillip monthly recession tracker – all remains well
For more information about how we decipher the recession tracker indicators, refer to the report “all clear for now.”
Optimism is high, as reflected by UMich consumer sentiment and CB consumer confidence indices, which broke multi-year highs last seen in 2004 and 2000 respectively while Bloomberg consumer comfort reversed the prior weakness and returned to the long-term uptrend. Note: the break of the long-term uptrend line is the trigger point for the market weakness and correction.
Interest rate related data
Ted spread remains well contained and even moved lower to 0.17%. Nothing alarming here. However, looking at another interest rate related indicator, 2s10s spread shows some deterioration here. The 2s10s spread continued to flatten as it breached a new 52-week low at 0.59%. If the 2s10s spread continues to flatten at such a pace, we could see a negative reading in nine months time. Watch carefully to see if the downward trajectory in the 2s10s spread continues. The warning sign for market weakness will appear after the 2s10s spread enters into negative territory (inverted yield curve).
Interest rate hike odds for December grew to 97% according to the Fed Funds Futures as of 24 November 2017. This confirms the idea that the FED is still on the path of tightening, implying further confidence in the economy. Bear in mind that the time to worry is when the FED suddenly switches to a dovish stance and starts reducing the Fed Funds Rate. Some exciting change within the Federal Reserve is the replacement of the FED chair. Coming in February 2018, Jerome Powell will replace Janet Yellen as the next Fed chair. He has never voted against Yellen on any interest rate policy decision as a Fed governor. Hence, it should be pretty much status quo as before even after Jerome Powell takes over as the Fed chair.
Impact of hurricane Harvey and Irma confirmed to be a one-off event as the non-farm payroll added 261,000 jobs in October. That figure was lesser than the forecasted 312,000, but the employment number grew back to a normal range. Moreover, the unemployment rate continued to improve to 4.1%, lowest since 2001. Note: The threshold (12-month moving average) to watch for unemployment rate also fell to 4.4%. The unemployment claims also painted a rosy picture as it recently hit a new low of 223,000, lowest in 44 years. Until a major sustained reversal in the unemployment numbers appears, the general equity market should continue to rise higher.
Figure 2: Weekly Unemployment Claims – lowest in 44 years
Price action wise, the S&P 500 index was supported by the 20-day moving average once again in the past month shown by grey highlighted box. The relentless support from the 20-day moving average further confirms the underlying strength of the market where the market appears ready to provide a backstop on any dips near the 20 and 60-day moving average. Expect the general market to ride higher with the 20 and 60-day moving average acting as a springboard to propel price into new record highs. The breaking point or threshold to watch here on the long-term basis is the 10 month moving average at 2457 points.
Figure 3: S&P 500 index daily timeframe – dip buying roadmap
Figure 4: Dow Jones Industrial Average index daily timeframe – dip buying roadmap