Stocks continue to rebound, shrugging off nagging geopolitical concerns and a soft retail sales report on renewed hopes that Russian President Vladimir Putin is set to back down from the standoff over Eastern Ukraine (although the evidence suggests otherwise) and that the Federal Reserve will continue to hold short-term interest rates near 0 percent until the middle of 2015 or beyond.
But disconnects within the market are appearing which suggest that not all traders share the ebullience demonstrated by equities. At least, by large-cap equities since small-cap stocks, as represented by the Russell 2000 Small Cap Index, continue to trade below their 200-day moving average.
You can see this in the way yields on U.S. Treasury bonds have plummeted since early July, taking the 30-year yield down to 15-month lows at 3.19 percent. That's nearly completely reversed the rise in rates caused by last year's "taper tantrum" caused by former Federal Reserve chairman Ben Bernanke's warnings that the ongoing QE3 bond purchase program was soon going to start being wound down. And it represents a downturn in rates of a type we haven't seen since the summer of 2011.
Historically, a drop in yields (and the associated rise in Treasury bond prices) has been associated with periods of geopolitical risk, market nervousness, and/or economic weakness. If fixed-income traders were preparing for a takeoff in the economy, inflation, or stocks, than you would expect the opposite to be happening.
A similar pullback is underway in commodities as well, with crude oil and copper but on the slide. Both of these are key industrial inputs that are highly sensitive to the vagaries of the economic cycle. So the fact that both are moving lower suggests commodities traders are worried about more than a few bumps in the road going forward.
West Texas Intermediate Crude Oil has dropped to $95.56 a barrel, a level not seen since January in the midst of fear over China's credit markets and what it could do to the world's second-largest economy. Copper prices, as represented by the iPath Copper (JJC), is dropping with a severity not seen since March.
Not all segments of the stock market have been able to ignore what's happening here. Energy stocks have been pulled lower in sympathy as the Energy Select SPDR (XLE) threatens to drop out of the upward trend that's sustained it over the last two weeks.
One gets the sense that the market, if you look at it holistically, is confused about where it should go next. Stocks suggest things are improving; commodities and Treasury bonds say otherwise.
No wonder, with a heavy calendar of Fed-related events next week including the release of the July Fed meeting minutes and Chairman Janet Yellen's statement at the Kansa City Fed's Jackson Hole annual symposium. There should be plenty of Fed-related headlines about the timing of that first interest rate hike in the days to come -- which, given the fact we haven't had a rate hike since 2006, is enough to make anyone a little nervous.
And of course, a Russian push into Eastern Ukraine remains a risk as well.
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