Friday had some of the most confusing market action I have seen in quite some time. I guess it really started Thursday night when the Japanese market plunged 4% for no decent reason. The European stock market then followed. US stocks hung in there for a while, but going into the American unemployment release at 8:30 am, the S&P 500 future was trading down 10 handles. The actual release was a non-event, coming in roughly in line, providing neither the bulls nor the bears with any real ammunition to move prices. After getting the big event over with, US stocks seemed to be set to follow the other world stock indexes lower.
US stocks opened down more than 15 handles, but soon started battling their way back. At one point in the morning it was reported that 35,000 E-mini S&P 500 futures were bought in the space of three minutes. Obviously someone big had some stock to buy. The aggressive buying started the moment the market opened, and didn’t relent until the end of the day.
In this day and age of Central Bank direct market involvement, stocks getting jammed higher does not surprise me one bit. This sort of massive buy program is nothing new.
But the divergence between the different stock markets is shocking. Usually a big buy program drags all stocks higher. Sure some countries outperform, but you rarely get Japan down 4%, Europe down 2% with the US rocketing up 2%.
And it’s not like the US session buying dragged up the other indexes. Friday afternoon Japan and Europe barely bounced while the US futures were ripped higher in a mad buying spree.
Something is going on, but I am not quite sure what it is. The US stock market seems to have broken all previous intermarket relationships.
Let’s walk through some charts. First let’s start with the same chart of the S&P 500 versus Japan and Europe with the time frame expanded.
The S&P 500 has diverged completely from the other major stock markets.
Now maybe you believe the US economy is strong enough to justify this sort of outperformance. But if that were the case, wouldn’t high yield bonds be roaring back from their shellacking of the past year?
Although credit rallied with stocks off of the February lows, for the past two weeks high yield bonds have been declining and refuse to confirm the US stock market’s enthusiasm.
Maybe you think this bounce in stocks is the result of the crude oil crash ending. That seems like a logical argument, until you have a look at the chart of the S&P 500 versus crude oil.
Again, the crude oil has been declining over the past two weeks even as stocks were rallying higher.
Maybe it is something to do with the Japanese carry trade. The AUDJPY / S&P 500 relationship is a great indicator of how much the Yen carry trades is affecting the stock market.
Nope, basically the same chart there as well.
How about a big switch from bonds into stocks? If the US economy is relatively strong, shouldn’t yields be backing up (at least at the long end)?
That relationship has broken down as well.
Maybe the US dollar weakness?
I guess you could argue Janet’s recent easing off on the monetary brake has caused the US dollar to sell off, allowing American stocks to rise.
Yeah, I understand that argument. Yellen has eased off the brakes, allowing US stocks to breathe. I just don’t get why US stocks would outperform so dramatically versus almost every other stock market and intermarket indicator.
Although I know markets climb a wall of worry, this move in the US stock market feels like a large Central Bank shift. That might seem a little tin foil hat’ish, but the complete divergence from almost all indicators and other stock markets leads me to believe this US outperformance is driven by a price insensitive large buyer(s). I suspect we will find that China, Japan, Switzerland or some other large government entity decided to sell Japan and Europe to buy US stocks.
Yellen’s recent move might not have convinced regular investors to rush back into stocks, but I do suspect it has caused some re jigging amongst Central Banks balance sheets. Unfortunately I think these sorts of illogical price insensitive moves will become more and more the norm in the coming quarters. This is what happens when you let Central Banks trade e-mini futures…
Thanks for reading,