There is a certain resiliency in the stock market. The SPX500 has charted a higher trough (HT) followed by a higher peak (HP). This is an uptrend. The stochastic is a momentum-based indicator. That it has fallen through the 70 level (red square) denotes that the SPX500 has lost momentum.
The data for February came in hotter than expected. This includes the 517K jobs that were created in January and sticky inflation. The US 10-year real rate has appreciated in response, and the short-end of the curve has jumped in anticipation of even tighter monetary policy by the Fed:
However, given the increase in yield and its inherent effect on the time value of money of risk assets, the SPX500 has held up well. We are now looking to see if another higher trough (HT?) will be charted in the series.
This makes for confusing equity markets. One would think that the higher yields would have applied a greater pressure on present values than is currently being reflected.
In terms of the time value of money equation, the numerator may be making the difference, i.e., future value. Whilst the required rate of return is applying a headwind, the market seems to be anticipating a higher future value, which is producing a counteracting tailwind.
Of course, this type of thinking may be premature. Equity markets may have delayed their decline. However, in an efficient market, one would have thought that the discounting would be well under way by now. The market needs a catalyst. Tomorrow's non-farm payroll is likely to cause volatility, especially given the blowout print from February's release. We also note that Tuesday sees inflation data, which has shown stickiness over the last month.
If we see surprises to the upside, yields are likely to move upwards applying more pressure on the SPX500. However, prints that come in softer than expected may lead to that next higher trough in the index's uptrend.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.