Dow Hits Record High on Most Reserved Activity Since December 2017
Dow Talking Points:
- The Dow joined other global equity indices Monday hitting a fresh record high that somehow still lacked any sense of enthusiasm
- Exceptionally low volume and the smallest daily range in a year-and-a-half are not immediately concerning when pushing records
- It is the context of a troubled growth and financial backdrop along with divergence from so many other risk assets that is worrisome
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US Indices Hit Record Highs as Other Risk Assets Dawdle
The drive higher seems unrelenting - at least it does for US equities. The major indices have opened the new week with yet another jolt higher with record highs for the Dow, S&P 500 and Nasdaq. Yet, beyond the statistical close Monday slightly higher than the finish to this past Friday, there are a few caveats that seem to throw cold water on any intent for deep-set enthusiasm. The lack of support from other risk-leaning assets is one such fracture in an otherwise comfortable sense of progress. If emerging market or high yield assets seem to disparate to a benchmark like the Dow, then surely the unmistakable divergence in altitude and even bearing relative to other global indices should clue us into something amiss.
Relative 12-Month Performance of Risk Assets (Daily)
Quiet Alone Never Killed a Bull Trend
Yet, bringing the focus back to the outperforming US equities market, even the localized push to record highs has its issues. Notably, the fresh record summit to start the new week lacked for any fruitful progress. After an initial jump Monday, there was little to no follow through - the Dow was barely changed on the day. Furthermore, the measures of interest and conviction were seriously uneven. Volume behind the market was the most anemic seen in months while the day's trading range (as a percentage of spot price) dropped to its lowest level since December 2017. Operating on similar precepts to the popular market aphorism 'bull markets don't die of old age', quiet is not the portent of a speculative storm. The quiet climb throughout 2017 is recent example how restraint can still maintain a steadfast course for bulls.
Chart of the Dow and 1-Day Range as Percentage of Spot (Daily)
The Context of Fed Dependency and a Lack of True Support
Yet, complacency is not a particularly reliable source of strength for the financial backdrop. Markets will inevitably see volatility return as all conditions normalize. It is the motivation for that rebalancing and the state of conditions for the speculative backdrop when that normalizing occurs. In both accounts, the stability of the global markets is remarkably suspect. The catalysts on the bullish side of the coin are wholly unreliable - such as the hope of the Federal Reserve offering up more support via rate cuts. That is not to say that it is not likely to come, the issue is that the favorable impact of such a development is small while the risks are inordinately large. Against the bullish performance meanwhile, we are dealing with issues that run from fears of recession to trade wars. And, if we were forced to collectively evaluate our exposure to risky seas, the record exposure to risk built up over time and the divergence in performance of 'risk' assets would readily contribute to risk aversion.
Chart of S&P 500 and Use of Leverage on NYSE at Broker Level (Monthly)
What to Watch For Moving Forward?
There are cues to watch for on both the technical and fundamental sides. On the charts, seeing previous range highs of 2,960 for the S&P 500 and 26,975 for the Dow falter as a launch pad to a further extension would quickly sour a need to capitalize on steadily accelerating risk build up. In techs, however, my interests are more attuned to the break of support on related assets that are far less stretched that can so readily discount the detriment in a sliding market. Seeing carry trade drop through multi-year wedge support or the DAX drop back below the 200-day moving average would signal a uniform from in speculative ambition through sheer complacency. On the fundamental side of the market, we need a scheduled or unscheduled development that can reasonably change the perspective of the entire financial system. That isn't to say that unique catalysts can't act as a spark to a dangerous fuse - the US subprime housing market proved such an amplifier - but there is far greater potential of full fallout if our issues ran through trade wars or indisputable signs of impending recession. We take another look at the Dow and its close US relatives in today's Quick Take video.
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