C.J. Lawrence Weekly – U.S. Stock Indices Hit New Highs Amid Little Fanfare
Despite softer than expected economic data out of Asia last week, the U.S equity markets rose to new highs. On Friday, the Dow Jones Industrial Average, NASDAQ Composite, and S&P 500 Index all closed at new records. Falling bond yields have been the bullish propellant so far this year, but even last week’s slightly hotter than expected CPI and PPI releases, which nudged interest rates higher, were not enough to knock the bull off its stride. The bond market took note of the inflation reports, lackluster 2-year and 30-year treasury bond auctions, and release of higher-than-expected U.S. budget deficit figures, pushing the 10-Year U.S. Treasury yield up 6 basis points for the week to 2.11%. But the S&P 500 stayed the course, advancing another 0.8% during the period, and is now up 20.2% year-to date.
The advance comes amid muted market fanfare and hearty investor skepticism. Both institutional and retail investors continue their doubting ways, and accompanying complacency suggests a lack of conviction for strong market moves in either direction. The 10-day moving average of the CBOE equity put-call ratio has floated below its 5-year average since mid-May suggesting that institutional investors remain biased towards seeking equity protection than seeking equity exposure. Meanwhile the CBOE Volatility Index (VIX), which tends to elevate during periods of uncertainty, has shrugged off recent geopolitical events and overseas economic challenges to remain below historical averages. At a VIX price near 12.4, the Index is comfortably below its 3-year average of 14.
Individual investors seem equally skeptical. Bullish sentiment in the weekly American Association of Individual Investors survey has risen in recent weeks but is tracking well below its 5-year average. Retail investor actions confirm the mood with net selling of equity mutual funds and ETFs continuing apace, while bond funds continue to be accumulated. This multi-year trend has accelerated in the past 12 months. The fundamental backdrop for stocks looks to be getting increasingly challenging. But market tops tend to form during periods of heavy stock buying, overwhelming bullish sentiment, and soaring valuations. Those ingredients aren’t visible in today’s market, helping the bull sustain its gait.