NEW YORK TheStreet
-- The recent pullback in global risk assets affected commodities, currency and even some Treasury
markets, but has been mostly absent from equities. Poor economic data out of the U.S., Europe, and China gave justification for a broad sell-off, and market analysts, including myself, were defensively preparing for equity weakness.
The pullback never reached the levels that were expected, but inter-market consolidation took place. The existence of the Bernanke Put, an imaginary price floor that keeps equity markets rising, has proven to be real. The Fed's stimulus efforts may not be showing up in the economic data to the degree that many would like, but it has kept investor sentiment elevated.
The nonfarm employment data from Friday outpaced expectations, but remained below where they need to be for real labor market growth. Economic data have proven volatile, which has kept the Federal Reserve active in monitoring the data. The data have improved domestically, but remained weak in Europe and China.
Until growth returns to higher monthly levels and is more stable, stimulus will probably stay. For that reason, U.S. equity markets look to be the best asset class on the table, and will continue to attract money flowing in off the sidelines. The flow of money into the market, along with gradual inclines in economic data and a strong earnings season, should allow for further gains, with little resistance near term.
The ratio above compares S&P Equal Weight ETF over SPDR S&P 500 . This pair gives a deeper look into the participation or breadth of market moves, both up and down. The pair had been flirting with a downward breakout during the past few weeks, as negative news continued to pour on, but support held steady. Corporate earnings, although containing a few prominent misses and unimpressive revenue, have held up rather well. Many believed earnings would grow by a meager 1.2%, but that drastically underestimated the current growth of around 5.2%. The pair has yet to break out of its range, either higher or lower, but with equity markets hitting new highs, it shows a chance of breaking higher.
The next chart is Barclays TIPS Bond Fund over Barclays 20 Year Treasury Bond Fund . This pair does a nice job of tracking inflation expectations, as well as positively correlating with risk asset markets. The TIPS Treasury auction proved disappointing after commodity markets dropped a few weeks back. The overall sentiment around global inflation, even in the face of robust central bank intervention, has deteriorated. The pair did break lower, bringing equities down with it slightly, but nothing that meaningfully altered equity markets' intermediate upward trend. The pair appears to have hit a bottom for now, which could make a further rise in risk assets next week, above record highs, even easier.
The last pair is of Materials Select Sector SPDR over S&P Equal Weight ETF. This pair has shown clear relative weakness in recent weeks. Although equities as a whole didn't fall with commodities and lower inflation expectations, the material sector did. Tepid industrial production and fear of falling global demand hurt the sector. This pair appears to have hit a bottom, and with a looming breakout in XLB, relative strength could propel materials into the mid-40s. This cyclical sector is one to watch as equity markets push toward new highs.
At the time of publication the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.
- Investment & Company Information