Tuesday, July 5, 2016

Limited Downside

We got the typical post holiday hangover, as the short sellers come back from holiday to take their shot at shorting this "irrational market".  You don't go up in a straight line after getting such a massive up move last week.  It is natural for the market to pullback from the buying thrust, especially now that we are back near that psychological 2100 resistance level.

With bond yields so low, that is providing another stimulus for corporations issuing bonds, who can lower their interest expenses and therefore increase profits.  Those who think low bond yields are sending a bearish signal for equities is confusing the "flight to quality" bid with the need for yield bid.  A central bank influenced bid without concurrent economic weakness helps the stock market.  No, Brexit will not cause economic weakness.  That is media hogwash.

So with these low yields, I see limited downside, and more grinding upside potential.  Nothing explosive on the upside, but S&P 2140 is very doable by later this month.  At the same time, I believe the upside in bonds is limited here because equities should be able to hold up well for the next few weeks under the current central bank money printing environment.

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