- The 10-year Treasury yield continues to fluctuate near six-week lows.
- Stocks are back on the offensive despite clear and present overvaluation risks.
- The S&P 500 Index hasn’t fallen by more than 1% in over 70 trading days; is a major correction coming?
U.S. government debt yields hovered at six-week lows Wednesday over fears that excessive risk taking was fueling a dangerous stock-market bubble.
Bond Yields Little Changed
The yield on the benchmark 10-year Treasury bond hovered within a 3 basis-point range on Wednesday. It was last seen at 1.769%, virtually unchanged near six-week lows. The yield on the 30-year Treasury note hit a low of 2.21%, according to CNBC data. Bond yields move inversely to the price.
Are Stocks in a Bubble?
Whether the market is actually in a bubble or merely overstretched is subject to debate, but the fear of overvaluation is resonating with many on Wall Street.
CNN’s Fear & Greed Index peaked above 90 last week, underscoring an environment of excessive risk taking in the market. The index has since fallen back to 77, which is still a reflection of ‘extreme greed’.
Other measures of overvaluation include the number of stocks hitting 52-week highs compared with those hitting lows. The difference between the two numbers now exceeds 10%, according to CNN.
The S&P 500 is also trading more than 9% above its 125-day moving average, much higher than the previous two years.
Stocks spent the latter half of 2019 setting all kinds of record highs. Optimism around U.S.-China trade negotiations and the continuation of low-rate stimulus by the Fed provided equities with the necessary catalyst to resume their uptrend. This came despite clear signs of overvaluation in key segments of the market.
Fed liquidity has helped to offset three quarters of successive earnings declines, mixed economic data and the escalation of geopolitical tensions in the Middle East. Although predicting a market top and subsequent correction is notoriously difficult, at least one strategist thinks we may be due for a pullback.
In an interview with CNBC, GuideStone Capital Management David Spika said the current market environment is reminiscent of the one we saw in January 2018 when stocks plunged. (As a refresher: The S&P 500 hit a record high in January 2018 before plunging nearly 12% over a two-week stretch).
According to Spika’s research, the S&P 500 has not fallen by more than 1% in over 70 trading days – making it especially vulnerable to a steep pullback. The analyst said it won’t take much to trigger a nauseating selloff in the major indexes.
He told CNBC:
When optimism is this high, it doesn’t take much to trigger a sell-off … [If] the forward guidance is somewhat negative; if we see a spike in interest rates; if anything comes out that potentially could hinder the next phase of the China trade deal, any of that could be the trigger that starts the downturn.
The S&P 500 Index was up again on Wednesday, padding its year-to-date return to just over 3%.
Disclaimer: The above should not be considered trading advice from CCN.com.
Last modified: September 23, 2020 1:31 PM