Take a deep breadth

The old saying “when the U.S sneezes, the rest of the world catches a cold” can be adapted. When the U.S stock market takes a day off, the rest of the world waits for it to start up again. Monday was president’s day, and U.S. markets were shut and activity across other global markets being subdued.

When U.S markets opened again on Tuesday, stocks reached another intraday record high. The S&P 500 has now gone 90 trading days without closing lower by more than 1%, underlining the strength of the market rally. Market breadth is one of the sentiment indicators traders like to monitor for possible short term indications of the strength of the rally or possible extent of the fall. There are several ways of expressing market breadth. One being the number of stocks trading at 50 highs minus the number of stocks trading at 50 day lows. Another is the number of stocks trading above their 200-day average. When more than 90% of stocks, in a given index, trade above their 200-day average, a correction is likely on the way. Currently for the S&P 500 the indication is around 80%, so possibly closer to the point of a correction, but the rally may have some legs left.

The swing in capital flows from active managers to passive managers has been well documented, and indeed John Authers comments on this trend in the Financial Times on Tuesday. Lipper research services reports this trend is continuing into January this year. For the fifth consecutive month, mutual fund investors were net sellers. In contrast for the 12th consecutive month Exchange Traded Funds saw net inflows, attracting over $40bn of new money in January alone.

Later today the Federal Reserve release the minutes of their last meeting at the end of January. The Federal Reserve are, publicly at least, committed to three rates rises this year. Could the first one come as soon as the next meeting in March? We may be slightly closer to knowing later.

Greece creditors claimed a breakthrough in the current discussions over July’s debt payment on Tuesday. Yields on two year Greek bonds fell by 1.3%. However, the yield remains high, close to 7.5%, for those feeling brave.

Despite this improvement in Greece, and the recovering eurozone economy there are still signs of strains within Europe. German two-year debt yields have hit a record low on Tuesday of negative 0.872%. This would suggest some investors are happy to lock in a near 3% lost per annum for the next two years, rather than risk their capital elsewhere. The spread between German and French 10-year debt hit the widest level since August 2012. Should the recent inflation trend within Europe continue, Mario Draghi may be facing a new set of problems.

Posted on February 21, 2017 .