If the market cycle is coming to an end, which it seems like it will in the next nine to 15 months, then industrials will see the most relative outperformance going forward and may be the next sector to break out. One of the first things my dad taught me about asset allocation was "sell banks first, industrials last." The 60-second technicals say that the uptrend continues.
If the S&P 500 (INDEXSP:.INX) fails to hold its gains at this new high, it brings in the dreaded gap-and-crap scenario. This wouldn't be a Wyckoff upthrust, as those only happen at the end of a trend and signal exhaustion in that trend. Since the prior six weeks have been a sideways range, breaking above that range and falling back below it simply exemplifies a lack of conviction. However, the potential for a headfake/pop-and-drop/gap-and-crap is very real, and with it the negative. Credit is still giving a thumbs-up for stocks to continue higher.
What did you learn at school today, Michael? The main catalyst being referenced for today's positive performance in stocks is the "post-equity record-high three-day weekend effect." If a major equity index makes a new record high on a Friday, it's extremely likely that it sees upside continuation in the next week. The signal -- called a Donchian Weekend Rule (courtesy Neil Azous) -- is even more powerful if it's a three-day weekend. Now I finally have something to report about what I learned today!
A significant number of bond futures are being rolled today to the September contract from June. I count 870,000 10-year futures, 1.01 million five-year futures, and 214,000 two-year futures as of 1 p.m. EDT. For the five-year futures, that accounts for about 57% of the total remaining open interest. The first notice is on Friday, but the roll process started in earnest last Thursday.
That's possible what's keeping pressure on yields today due to the growing net long in the futures. The other is the abnormally tight coverage ratio in today's POMO (permanent open market operations), which was in intermediates (seven- to 10-year) and signaled that dealers were having a tough time sourcing any inventory. Note to self, again: Never react to big gaps in the 9 a.m.-10:30 a.m. time frame for bonds -- they always revert.
In honor of Paul McCulley returning to PIMCO as the chief economist, check out his "rule" on how the economy will perform in the coming quarters. He looks at the three-month average, year-over-year gain in nondefense capital goods orders excluding aircraft. The charts are below. Not a bad indicator, Paul.
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