If you are a directional trader or investor, the last 2+ months have been incredibly frustrating. The S&P 500 fell quickly in early August, but since then it has only been choppy trading between 1220 and 1100. For the 5th time we are looking at a retest of the 1200 level on the S&P 500 and for the 5th time we are wondering if this is just another head fake. The Columbus day rally felt insincere by all measures. I guess when the negative bond traders are on vacation then the equity traders can have a day of optimism (or short covering). The VIX has pulled back in this latest rally, but not enough to call a return to normality. The dollar has weakened as well, but still holds its ground at 77.50 on DXY:
Other than slightly better economic releases, the one market factor that actually looks like it might be turning the corner is the 10 year treasury yield (and US interest rates in general). The 10 year quickly fell from 3% to about 2.15% in early August. With tremendous volatility it has tested the 1.7% levels twice with what could be called a double bottom:
The other highly positive market signal is the large tightening in US banking credit default swap spreads. Morgan Stanley widened out to 600+ bps and has since tightened in to below 400 bps. These are still highly elevated levels, but represent a huge rally and relief:
I am not counting this risk flare over, but it does seem to be getting long in the tooth. Either that, or this is the small short covering rally right before the storm really picks up. As the devil’s advocate I will throw this piece of history at you: October 13, 2008 was Columbus day as well. The S&P 500 was up 11.58%! By wednesday it was back to where it started. The rest is history.
Funny headline from CNN Money:
Dow jumps 936 points and S&P up 104, in the biggest point gains ever. The Dow, S&P and Nasdaq all gain over 11%.