Positive Investor Sentiment Stokes Broad-Based Market Rally

Two Fridays ago, Treasuries got hammered after the release of Februarys employment report, which showed that nonfarm payrolls were growing above expectations despite global economic issues. But the move lower was met with strong buyer interest and the trend toward lower yields resumed, which in turn kept the rally for equities in place. Stocks ended the week with the S&P getting back to the flat line for the year, but right up against key overhead technical resistance at 2,050.

If stocks and crude oil continue to trade higher, Treasury yields may give way to some rotation. But so far, bond buyers are not budging, with the 30-year Treasury Bond currently paying out 2.65. The rally has been dominated by cycle sectors, which makes the resilience in the bond market that much more impressive, as yields typically rise when money is flowing into economically sensitive stocks. The 30-year yield has moved up to its long-term downtrend line that has defined the broad macro deflationary landscape. The situation only will change if the 30-year yield breaks above 3.2

The whole rally in Treasuries in January and February seemed a little too obvious to sustain lower yields for too long. Markets move on skepticism and one didnt feel much skepticism by the time the February low yields were reached. Now, the 30-year yield has retested its February 2015 low and is pushing higher. The U.S. labor market continues to take up slack and wages will have to move higher at some point. The disinflationary effects of the dollar rally and oil decline are beginning to diminish and yields have moved higher as a result.

Though there is little empirical data to support the rally in the deep cyclical sectors, investor sentiment has seen a huge shift from extreme fear and bearishness to buying steeply sold off cyclical stocks with the notion that an earnings trough will occur in the first quarter and the rest of the year will see a pick-up in top-line revenue and earnings growth. At this point, this notion is purely built on the perception that the bazooka-like quantitative-easing (QE) measures announced by the European Central Bank, Bank of Japan and Peoples Bank of China will stimulate those economies which, in turn, will boost U.S. export trade. The jury is still out as to whether this scenario will materialize, but there is no question that a little momentum in the cyclical sectors led by a rebound in oil prices morphed into a lot of momentum fueled by massive short covering.

And this is why the current rally remains suspect in my view and why I continue to recommend more defensive income strategies where the risk/reward ratio is skewed more to lower risk.