Although market volatility on the whole remains at historically low levels, a few key things are starting to emerge that could have a big impact on the markets as a whole. Of particular interest is the rally in the interest rate futures sector, particularly the 30-year bond and the 10-year T note. The interest rate futures sector is the largest by far of all the market sectors and subsequently attracts the biggest and smartest traders. This rally suggests that something is going on that the larger public is unaware of and it does not correlate with stocks that are at or near all time highs. This is a key relationship to follow as stocks point to risk on, but the interest rate sector says otherwise.
For now long-term trends as per LS Trader‘s proprietary analysis remain as they have for quite a while, up for stocks, up for interest rate futures and mixed for the dollar and commodities.
The S&P 500 posted new all time highs as expected, registering at 1898.5 basis the June e-mini contract on the 13th May. Weakness followed for 3 days following the new high, but the market recovered somewhat on Friday. The long-term trend remains up.
The Nasdaq 100 remains considerably weaker as it continues to trade around the middle of its current range, but critically above the shelf of support at just above 3400, which keeps the long-term uptrend intact.
The Nikkei is still the weakest of the stock indices that we trade at LS Trader and remains the most likely to break down as it is currently the only 1 of 4 in a long-term downtrend. What is of particular interest here is the fact that this market sits just above key support, as does USD/JPY. These 2 markets are highly correlated as we have written previously, so moves in the Nikkei are mirrored in the dollar/yen. Should both of these markets break through support this could have a key impact on the broader market, as Japanese markets do play a key role in global markets.
Volatility remains at historically low levels and this week has seen the VIX fall to new lows yet again. A large spike higher in volatility is very much overdue.
Commodities for the most part remain mixed, with only a handful of decent trends present, which are in Palladium, feeder cattle and soybean meal. Al 3 markets on the basis of continuous back-adjusted contracts remain near multi-year highs
Currencies remain mixed as they have for several months. Overall the past week has been a good one for the dollar, but dollar gains are not universal. As mentioned above, USD/JPY remains poised above critical, trend-defining support, a break of which could be a key influence in several markets. The break of critical support would confirm a change of trend to down for this pair for this first time since September 2012. It should be noted however that USD/JPY tends to dance to its own drumbeat and a weaker dollar here does not suggest overall dollar weakness. The dollar can decline against the yen and rally against other majors, and often does.
It should also be noted that the commodity currencies of Australia, New Zealand and Canada all continue to do well and remain near the recent highs.
Interest rate futures
The 30-year T bond reached its highest level since May last year as the interest rate futures sector continues to strengthen. The 10-year T note also broke from its range as we suggested may happen in last week’s update. As mentioned above, price action in this sector is not consistent with a rising stock market and suggests something big may be building up! Interesting times are just around the corner.