“The summer wind, came blowing in – from across the sea
It lingered there, so warm and fair – to walk with me
All summer long, we sang a song – and strolled on golden sand
Two sweethearts, and the summer wind” – Summer Wind, Frank Sinatra
Earlier in the week I wrote a piece to a vastly European audience referencing the above song by the great Frank Sinatra. My point was that I thought the song captured investors’ current summer romance with the stock market quite well as news flow ‘across the sea,’ back and forth between the US and Europe played a game of equilibrium to keep the stock market afloat. One day it’s good earnings reports from a large US conglomerate, the next day improving economic data out of Europe that layers another bid under the market. While we must play the market that is rather the one we wish for, the song above eventually ends with an abrupt stop to the romance. Thus I can’t keep but also liken this latest summer rally to a game of musical chairs. In other words, when and where the catalyst for a mean-reversion to the downside in stocks arrives from, no one knows. What we do know however is that when the music stops, those that chased stocks higher simply because they were mandated to will likely bleed the most, while those with more patient attitudes will get better entry levels to buy stocks. Patience, as they say, is a virtue.
As a general rule, personally I do not trade much if at all on summer Fridays and Mondays as the thinner volume can often lead to fake or choppy moves and thus a less than true read on the tape. Thus, I am inclined to wish all of you valued readers a relaxing summer weekend, but will first walk you through the following two charts:
After one day of fun (Wednesday), yesterday the market settled right back into its reliable pattern where any intra-day dip gets snapped up by the bulls and leads to plenty of green on the screen. I did note however that while not as pronounced yesterday, it was the third day in a row where many stocks trying at new breakout attempts again failed to do so.
At the end of the day, the Russell 2000 small cap index made good all of Wednesday’s losses and in fact recorded a bullish outside day on the daily chart below. As long as this is the type of reaction we see to even the slightest weakness, the ball remains in the court of the bulls. The bears on the other hand will point to the negative divergences between momentum indicators such as the stochastics (making lower highs) versus the stock indices (making higher highs) that continue building both on daily and weekly charts. Risk happens fast, and that to me is the front and center concern as we push ourselves through these last muggy days of July.
Last but not least, let’s look at 10 year US treasury note bond yields….yes, they do matter for stocks. Through the lens of a 20 year chart, note that a mean-reversion move higher in rates doesn’t reach its target until at least the 3.00% area. In other words, while rates have accelerated higher from 1.60% to 2.60% in just a couple of months, plenty of upside remains, which at some point, for a few weeks at least is likely to spook the broader stock market into a retreat.