Two weeks ago, we wrote a Weekly Update that looked at the various market indicators traders could use to determine whether the market was experiencing a temporary bearish pullback or beginning a new, extended bearish trend. The markers we looked at were:
- Small-cap Stocks
- Emerging Market Equities
- Leveraged Currency Trades
- U.S. Treasuries
- Defensive Stocks
- CBOE Volatility Index
Although these markers were pointing toward a potential bearish trend two weeks ago, we thought it was still premature to rule out a resumption of the longer-term bullish trend. With that in mind, we thought it would be helpful to revisit those markers to see how they are doing two weeks later.
Small-cap stocks, as measured by the Russell 2000 (RUT), have bounced nicely off their support level and are climbing back toward their 52-week high.
Weekly Chart of the Russell 2000 (RUT)
However, while this bounce looks good, we don’t want to get too far ahead of ourselves. There is still the possibility that instead of continuing along this uptrend, the RUT could start to consolidate.
Emerging Market Equities
Emerging market equities, as measured by the iShares MSCI Emerging Markets Index Fund (EEM), have also bounced off of their long-term support level.
Weekly Chart of the iShares MSCI Emerging Markets Index Fund
Leveraged Currency Trades
Two weeks ago, we explained that one key currency trade that analysts have been watching is the carry trade with the Japanese yen (JPY). This trade involves selling the JPY short and using the proceeds to buy assets — like U.S. equities — denominated in other currencies. This trade weakens the value of the JPY.
The weekly U.S. dollar versus Japanese yen (USD/JPY) chart shows that the USD has been getting stronger compared to the JPY for the past couple years thanks to both the quantitative easing (QE) program of the Bank of Japan and the carry trade.
Chart of the U.S. Dollar versus Japanese Yen
Last month, the carry trade started to unwind a bit, which is concerning for U.S. equity investors. However, the USD appears to be regaining some strength, causing the USD/JPY to level off. This confirms that it is still too early to worry about the imminent demise of the carry trade.
The “safe-haven” effect that was driving Treasury yields lower last month seems to be wearing off a bit, as you can see by the chart of the 10-Year U.S. Treasury Yield (TNX).
Weekly Chart of the 10-Year U.S. Treasury Yield
The uptrending support level that makes up the bottom portion of TNX’s uptrending channel seems to be intact, which tells us that traders are still watching the Fed’s actions regarding the tapering of QE, but don’t see it leading to a flight to safety just yet.
As we continue to monitor whether or not defensive stocks are in control by looking at a relative strength chart comparing the Consumer Discretionary Select Sector SPDR Fund (XLY) and the Consumer Staples Select Sector SPDR Fund (XLP), we are seeing discretionary stocks reassert themselves.
Weekly Comparison Chart of the Consumer Discretionary Select Sector SPDR Fund (Xand the Consumer Staples Select Sector SPDR Fund
As you can see in the weekly comparison chart, the chart is moving higher, which means discretionary stocks are in control. This is a good sign for the current bullish trend.
CBOE Volatility Index
Lastly, the CBOE volatility index (VIX) was up above 20 the last time we checked in on it, but it has since turned back around.
Weekly Chart of the CBOE Volatility Index
During the past few years, a VIX reading below 15 has been indicative of a level of comfort or complacency among traders, and that has corresponded with a bullish trend in the market. The VIX is currently right under 15.
The Bottom Line for Next Week
It’s still way too early to give up on the bullish mood on Wall Street. While there are definitely going to be some bearish trading opportunities out there, which we will look to take advantage of, we plan on giving our portfolio a bullish slant for the time being.