On Friday, there continued to be significant hedging in the options market for a potential weakening in the S&P 500 and Russell 2000. There has been steady buying in August, September, October and January puts. The purchase of downside risk protection could have more to do with options premiums being low and stocks being elevated rather than a strong conviction the market is about to depreciate. September and October are traditionally weak times in the market.
The U.S. Treasury 10-Year Note has formed a series of “higher lows” going back to July 2012. While the FOMC is likely to remain dovish in the near-term, we should expect interest rates to migrate higher over time. As long as the 10-year rate remains below 5%, rising rates are correlated with rising stock prices. On the other hand, the bond market may have already entered a multi-year secular bear market.
The Delta MSI is bullish and in the mid 70% range. Stocks are not overbought as measured by the percent of stocks trading above their 10-day moving average. We continue to recommend full equity exposure. We like the following ETFs: PDP, RSP and DWAS.