We can see below that large players still support the SPY price while the cumulative tick is still negative, implying that money is not supporting small cap prices.
However, rotation from fixed income could continue as the dynamic of the fixed income selling turned very negative on Thursday. We can indeed see below that investors on the 10Y started to buy weakness on Wednesday, but that they had to give up on that move and sell their newly acquired long positions on Thursday and Friday.
This indicates that the bond selling could last longer and go much deeper than expected because professional large speculators could not turn the 10Y around even though Treasuries looked cheap and ripe for a bounce. I believe that this is also the reason why the Cumulative Tick sold on Thursday and Friday while the 20DMF was strong: noticing that rates were increasing for real and could trigger more Treasury selling in the coming weeks, large investors started to rotate out of small caps and back to the more stable larger caps.
The same occurred for currencies: the US$/Euro started to be weak going into Wednesday, but this move reversed on Thursday and Friday, with waves of Euro selling.
The Yen was weak all the way down.
We can also see below that Nirp refugees are repatriating to their home countries as both German and Japanese bonds now show positive yields.
In theory, the yield differentials between US and Japanese or German yields should favor a flow of money into US assets, but in reality fixed income investors are now considering what they might believe is a historical reversal in government bonds.
When we see that all corporate bonds from blue chips to junk are under pressure, then we might also suspect that US corporations will have more difficulty rolling over existing debt or issuing new debt.
Conclusions:
Increasing yields tell us that the world is moving into a debt contraction phase as fewer new bonds are being issued either by governments or private corporations.
Those who are already heavily in debt will need to compensate with other forms of cash generation. For governments and municipalities, this means higher taxes and lower costs. (Fire administrative staff, lower entitlement spending.) On a timeline perspective, higher taxes always come faster than lower spending. However, both are deflationary.
For corporations, the new administration will set a plan (for 2018) to reduce taxes and increase income (hammer the foreign competition with high duties.) However, for corporations who need to raise cash in 2017, higher rates will cost them more or they will need to dilute shareholders.
It is interesting to look at where we are in terms of historical P/E and dividends yields evolution.
The Table below dates of last February. We can see that the Russell 2000 stocks were still displaying some sort of profit (P/E is still positive). Birinyi was forecasting a one year P/E much lower.
If we now look at the same Figures 9 months later, we can see that The Russell 2000 P/E is Nil, indicating that the whole index of 2000 stocks is posting losses. Birinyi's "forecast" is higher now than it was in February, but what is the probability that he is more right now than he was 9 months ago?
The difference is that in February 2016, we had a Japanese Nirp policy combined to a deflationary move in world rates. Today's move in worlds' rate is inflationary, which point to even lower income for Russell 2000 companies. How can these Russell 2000 companies "invest in the 2018 Trump growth" with operational losses. The large caps might use their newly repatriated 2017-2018 cash to buy stocks back, but small caps will probably have to sell more shares.
