While many have cited the lack of economic support as a reason for risk assets to pull back, markets are getting comfortable with the "new normal." The new normal brings with it lower growth measures, around 2% growth in gross domestic product, and overall acceptable, yet not remarkable, economic readings.
For investors, the real importance lies in beating or missing expectations. Markets price in expectations, and whether a company or an economy over-performs or underperforms that measure indicates future price movement.
For example, U.S. employment data in weeks past were encouraging, but not up to pre-recession levels. Job numbers, however, outperformed expectations, leading to equities' current trajectory upward. Markets are short-sighted, and price action relative to expectation proves that to be true.
The pair below is of S&P Equal Weight ETF
If the pair moves up on days that equity markets nominally move up, then there was broad participation in the move. Broad moves are more favorable to a trend's strength than moves without broad participation.
As we can be seen below, the pair has broken out of its trend sideways. This push higher signals that investors are bullish on U.S. equities and that risk-on sectors are going to continue their uptrend. Equity indexes look slightly overbought, and so a near-term consolidation could be in order.
The next pair uses Treasury markets to measure risk sentiment in the U.S. economy. The chart below is of Barclays 1-3 Year Treasury Bond Fund
As the pair moves higher, the yield curve steepens. A steeper yield curve is bullish for risk assets.
The pair has recently broken out of its downtrend and continues to push higher alongside equities. Bond markets tend to predict future movements in equities, and so when this pair begins to falter, investors should begin to set their portfolios in a more defensive position.
The last chart is of SPDR Barclays Capital High Yield Bond ETF
The pair shows investor appetite for higher yielding assets. Investors trust that Federal Reserve Chairman Ben Bernanke will not let things get too bad, and risky corporate debt is reaping the benefits.
Similarly, low interest rates are pushing investors into higher yielding assets such as dividends and high-yield debt. As long as the economy remains stable and rates are low, high yielding assets will outperform.
At the time of publication the author had no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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