The Dow Jones Industrial Average and other major indices pushed higher on Monday amid quiet trading as crude oil continues to benefit from chatter of a possible OPEC/Russia supply freeze deal — repeating the headlines from February.
Expect the recent market melt-up to continue, as the low-rate/low-volatility regime isn’t likely to be interrupted until Federal Reserve Chairwoman Janet Yellen’s Aug. 26 speech in Jackson Hole, Wyoming. Cognizant of recent inflationary pressure from wages and shelter costs, as well as the ongoing strength in job gains, she is likely to hint at a rate hike by the end of the year — something the futures market hasn’t priced in.
In the end, the major indices set a slew of new highs. The Dow Jones Industrial Average gained 0.3%, the S&P 500 gained 0.3%, the Nasdaq Composite gained 0.6%, and the Russell 2000 gained 1%. Treasury bonds were weaker, the dollar was down, gold gained 0.3%, and crude oil extended its recent rally, rising 2.8%.
Russia’s energy minister said his country is speaking with Saudi Arabia and other producers with an eye toward balancing oil market supply with demand. But after a flurry of short covering, oil longs are becoming a crowded trade: According to CFTC data released on Friday, bullish bets on U.S. crude increased for the first time in a month.
Materials stocks led the way with a 1% gain while defensive utility stocks were the laggards, down 1.6%. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) gained 6.8% thanks to an upgrade by analysts at Mizuho noting relaxed debt covenants. AngloGold Ashanti Limited (ADR) (NYSE:AU) lost 5.3% after first-half revenues missed estimates.
On the economic front, homebuilder sentiment improved, New York manufacturing activity weakened and Japanese Q2 GDP was weaker than expected. Overall, the summer doldrums have really set in: Trading volume was the weakest of the year-to-date.
It’s likely the period of ultra-low volatility that the market has enjoyed will soon come to an end. Already, according to Jason Goepfert at SentimenTrader, the past 20 days through Friday have featured one of the narrowest trading ranges in history and the lowest level in 20 years.
The last occurrence of such a narrow trading range was back in September 2014 as stocks were flirting with new highs ahead of a nearly 10% Ebola-driven plunge that October.
Since 1928, there have only been seven other examples of stocks acting like this. And the near-term performances that followed were consistently weak with stock only rallying a single time for a small gain. One month later, stocks were down an average of 1.5% with an average max loss of 2.8% vs. an average max gain of 0.7%.
Strategists at Bank of America Merrill Lynch are worried that Yellen’s Aug. 26 speech could mark the high of the post-February rebound as she is likely to espouse a more hawkish view on policy given recent economic data.
If so, market participants will likely have to refocus on more troubling fundamental catalysts such as uneven data, an ongoing corporate earnings recession, volatile energy prices, extremely compressed bond spreads and aggressively bullish investor positioning.
But until then, the melt-up goes on.