The weekend press was full of surprisingly bullish stories ("Clear Skies for U.S. Shares," the WSJ headline read) on how the stock market, now that Nonfarm Payrolls are back to modest growth and the ECB will be keeping rates low and lower for a long time, is likely to keep rising through the summer.
Great. This on the heels of last week's Institutional Investor bull/bear numbers. At 62.2 bullish, it was the second-highest on record. Bears are nowhere to be found: 17.3 percent! Close to historic lows.
Suddenly, a lot of people have gone from hating the rally to believing the modest economic recovery means the rally has legs.
And it's starting to show in the stock market. The sector leaders this month are ALL cyclical groups that do better when the economy is improving.
Sector leaders this month:
- Financials: +2.7%
- Industrials: +2.2%
- Cons. Discretionary: +1.9%
- Energy: +1.6%
- Tech: +1.5%
Telecom, Utilities, Healthcare and Consumer Staples--defensive sectors--all lag.
Now, we're getting another lift as many are taking off hedges because they are lagging the markets.
That worries me. When the bears capitulate, when everyone thinks a correction will never come, that's when the correction will come. The only reason I am not too worried is that there is a difference between being "euphoric" and believing a correction is less likely.
We are not in a "euphoria" phase, at least not yet.
And that give me some comfort that this "Rodney Dangerfield of all-time bull rallies" (as one trader called it) might continue. But what a strange rally! We seem technically overbought on a short-term basis. The put/call ratio is absurdly low, the Volatility Index (VIX) is moving toward single digits. And volume has dried up everywhere--in stocks, in bonds, in foreign exchange.
What about the bond market? Ten-year yields at 2.6 percent certainly do not signal expectations that the economy is in lift-off mode. But that could change very quickly: Look at the David Malpass editorial in WSJ today, arguing that the data supports the idea the Fed should begin to raise rates soon.
Amen to that. I still think yields are too low, since Q2 real GDP is looking much better. Most traders I know were expecting 10-year bond yields to hit 3.5 to 4 percent this year.
As for inflation, well, I've been wrong on this all year. I thought PPI and CPI would pick up more dramatically by now and that there would be some wage pressures as we got unemployment in the low-6 percent range. Not yet, but I still think that is likely soon.
That's where we are at. Slow grind higher.