Heading into the end of the week, the stock market seemed to take to heart its mandate to frustrate the majority of participants most of the time.
It was a tale of two markets. Monday and Tuesday were bullish with the S&P 500 (^GSPC) rising more than 1% while the badly lagging Russell 2000 (^RUT) ripped more than 2% on Monday alone after its 1% jet higher last Friday.
Under the hood, divergences abound. The S&P 500 and Dow Industrials (^DJI) managed all-time closing highs on Wednesday while the Russell 2000 could not hold its 200-day simple moving average yesterday. Internally, NYSE breadth remains mediocre even at these levels
In addition, economically sensitive sections of the market have also begun underperforming significantly. Most notably, the iShares Home Construction Index ETF (ITB), which traded up by as much as 7% during the first two months of the year, has fallen 12% since and now trades down 6% YTD.
Meanwhile, the treasury market has been a one-way ticket, doing nothing but rip higher all week and pressuring the 10-yield from (^TNX) from last Friday’s 2.62% close down to 2.50%, the lowest levels since October of last year.
Theories abound regarding treasury strength, from the action being a response to the German Bund rally to short squeeze rumblings, but, perhaps, the simplest explanation is the right one. That is, the global economy is slowing and the fear bias is right, at least for now, focusing on deflation.
We continue to expect this type of jarring two-way action through the summer months with trading volume and hence liquidity. Whether this frustrating chop is just a part of a larger and longer term topping process remains to be seen.
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