• The Eternal Bull Market

    After AAPL's earnings, investors have plunged back into the most liquid mammoth stocks with the firm conviction that the current bull market will soon become the longest and might even morph into an eternal bull market. (An eternal bull market starts to emerge when the majority of active traders have never experienced a bear market in their trading life.)



    The Cumulative Ticks weakness also confirms the bullishness of investors in regards to the largest stocks as risk management forces some investors to short the small caps



    But the small caps although they are now underperforming, will soon follow the move higher.



    Note that some sectors such as energy, finance or industrials look somehow weaker.







    Almost as a side story, the surprisingly poor employment report of Friday pulled the 10Y rates down.



    US Treasuries bounced, but not many investors were eager to buy higher prices.



    Conclusions:

    It is interesting to see how tiny moves can make someone oblivious to the larger picture.
    Below is an update of the Yield comparative Figures that I published a few months ago.

    As a reminder, the Pink line (High Quality corporate bonds) is always above the Blue line (10 Y Government bonds.) Corporate bonds are indeed always more risky than Government bonds. Their distance stayed stable between 1% and 1.25%, except during the 2008 crash.

    The Green line is the more subtle S&P500 earnings yields. This represents the ratio between the total earnings generated by the S&P500 stocks and the inflation adjusted S&P500 price.

    When the Pink line crosses above the Green one, it is when on average borrowing money to buy back shares does not make sense anymore. It is also the place where investors would prefer buying corporate high Yield bonds than the S&P500.

    I believe that if the Fed wants to have room to increase rates next September, the S&P500 will have to adjust lower. I think that it will adjust lower in anticipation of the Fed rate hike.