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Real Time Insight

Today marks the 22nd time this year that we’ve hit an all-time high on the S&P 500. Trading as high as 1963.91 intraday the broad market index looks poised to hit another closing high. Those of us that look for correlations between the S&P and other financial instruments are seeing some parts that are very ordinary and other correlations that aren’t making much sense.

First, the CBOE volatility index or VIX at a 7 year low makes sense. There is a lot of complacency out there because at times it seems like the market is going to continue to go up forever. You would expect to see the VIX where it is so this correlation I can deal with.

What makes a whole lot less sense it the yield on the 10 year Treasury Note. If the market is on fire like it is, you’d expect to see a 10 year yield that was as least at historical norms if not well above that. We have neither. The 10 year yield is approaching 2.6% while historically we’re used to seeing it closer to 4%, a level we haven’t seen since 2009.

Part of the explanation for the 10 year is the Fed’s bond buying program which continues to taper down. The artificial demand created by the Fed’s purchases is helping to drop yields across the board. Historically inflationary expectations are bullish for the market and send bond yields higher as investors need to be compensated for the inflationary risk. Right now we can’t really see those expectations in the 10 year yield because the yields are being so suppressed. Whether or not they should be there is another debate.

The question is, with the market at another all time high, who is right? The VIX is showing lack of fear in the market, the 10 year is showing fear in the market.

Are we more likely to continue higher from here over the next month or is the pullback finally on the way?

I think we’re likely to continue higher. There is too much liquidity for a firm pullback. The market would likely come in and buy the dips, preventing a deeper retracement. It’ll be boring, slow, and steady but we will continue higher for the foreseeable future.

Let me know what you think. 

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