The U.S. equity market continued to set a record pace of advance last week, gapping well above its 200-day moving average to a degree not seen since September of 2007. The industrial and energy discretionary shares picked up 3.2%. In large measure, the rally in energy reflects the continued rise in both crude oil and natural gas, which have picked up 6.5% and 8.4%, respectively, as global inventories continue to fall. The strength in energy and industrials served to support bias towards smaller capitalization shares as the Russell 2000® Index outpaced the larger S&P 500® Index, 2.05% to 1.6%. Global markets participated in last week’s rally as well, with developed markets tacking on 1.2% and emerging markets another 0.6%. The story in commodities continues to be the rally in palladium, with the price rising from $470 per ounce to $1,125 per ounce over the last two years. This is driven by global demand for the automobile catalyst, as declining demand for diesel engines picks up speed following the emissions scandal of 2015. Intermediate term interest rates in the U.S. continued to move higher, as the 10-year treasury reached 2.557% last Thursday, the highest level since the 2.626% of March 13, 2017. Some of the advance was attributed to stories circulating that China plans to curtail its purchases of U.S. debt obligations, while others point to the rebound of inflation measures in December following November’s weaker showing as a contributing factor.
Worth revisiting this week is the topic of stock market price volatility. One of last year’s major concerns was the lack of volatility and high degree of perceived complacency. The counter to that being the degree to which the option market skew, or fear/greed bias, was tilted. This year, that dynamic appears poised to shift. As illustrated, the CBOE volatility index, or VIX, looks to have bottomed following a two-year decline. Concurrent with the potential inflection in the VIX, the option market skew, or fear versus greed indicator, appears to be migrating towards greed. None of this implies imminent disaster, but it does serve to put investors on notice that a change is in the offing. Again, our view is that the market is beginning to reflect the economic realities of a late stage expansion, one borne out by the rally in industrials and energy. Next week, we begin earnings reporting season and, with it, more insight into the year ahead.
Source: All statistics herein obtained from Bloomberg.
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