Charts Showing More Upside For Stocks And A Rebound In Yields

By Bryan Rich 

July 15, 2016, 4:20pm EST

Over the past week, we’ve talked about the rational reasons to be long stocks.  Today we want to walk through a few charts as we end the week.

Stocks

Stocks have set a new record high every day for the entire week.  The last time that happened was in 1998.  And following that period, stocks went up 50% over the next two years.

Last Friday we talked about the powerful influence of higher stocks.  Central banks are well aware.  As we’ve said, they want stocks higher, they need stocks higher. It’s the most effective resource they’ve had for restoring and building confidence, and promoting stability, in a low growth, vulnerable world working out of a debt crisis.

With that, we close the week near fresh record highs in U.S.  This is 8% off of the bottom just three weeks ago.

spx jul 15

Sources: Billionaire’s Portfolio, Reuters

As we came into the week, the post-Brexit laggards had been Japanese and German stocks, and yields in the government bond market.

First, as we’ve discussed this week, the week kicked off with good news out of Japan.  They’ve telegraphed a big fiscal stimulus package.  And with the BOJ set to meet at the end of the month, and growth and inflation in Japan recently downgraded, Japan is in the position to unleash the powerful combination of both fiscal and (more) monetary stimulus.

With that, Japanese stocks have been on a tear for the week, now 11% off of the Brexit lows.  The Nikkei has now fully recovered the sharp post-Brexit declines, and looks like a technical breakout of the correction off of last year’s highs is in the making (i.e. going higher).

jap stocks july 15

Sources: Billionaire’s Portfolio, Reuters

And as we’ve said, we think Europe will be next to roll out much needed fiscal stimulus.

With that, German stocks aggressively rebounded this week too, led by bank stocks, which had been trading like big bank failures were in the pipeline (namely, Deutsche Bank).  But for the German, European and global economy, Deutsche Bank is too big to fail. German stocks also look like a bullish technical break is coming.

germ stocks julu 15

Sources: Billionaire’s Portfolio, Reuters

Yields

With all of this said, early in the week we discussed the big divergence between record high stocks and record low government bond yields (particularly in the U.S.).  And yields are now bouncing…

Germany sold negative yielding 10 year government bonds this week.  And now, as we end the week, the German 10 year yield has gone from -20 basis points back into positive territory.  This is a big deal and a key area to watch – the zero line.

german yields july 15

Sources: Billionaire’s Portfolio, Reuters

The U.S. 10 year traded just under 1.70% going into Brexit.  After the UK vote it hit a record low at 1.32%, and goes out this week at 1.59%.

us yields july 15

Sources: Billionaire’s Portfolio, Reuters

Remember, we talked earlier in the week about the divergence between record high stocks and record low yields.  And we looked back at the performance of stocks following the sharp bounce in yields from the 2012 new record lows.  In this environment, yields bounce when sentiment improves.  Improved sentiment is good for stocks.  In 2012, yields bounced from 1.38% to, ultimately, 3%, and stocks finished up 16% in 2012, and added another 32% in 2013.

Have a great weekend!

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