Despite the sizeable run up in stocks following Wednesday’s FOMC meeting, the bears are still in control.
How do I know? Importantly, most of the big money that moves the market does not do so by shorting. Instead, big money is typically long-only, and stays invested. When institutional investors are bearish, they position in lower-beta, defensive parts of the market. They also allocate more toward bonds.
When we look at the defensive sectors of the stock market now, like utilities and consumer staples, their outperformance is holding. In other words, the comeback over the last 72 hours does not appear to be confirmed by significant weakness in defensive stocks.
This is how bears are in control. Not in terms of market direction, but in terms of allocation and what they are buying into. The fact that utility stocks aren’t weaker suggests institutional investors are still nervous.
So, we have this euphoria over payrolls and the reignition of the idea that the Federal Reserve won’t hike rates. And against that, big money is still concerned. Gold prices confirm this, as they haven’t sold off into the rally in equities.
I still think the short-term conditions remain risky, and intermarket behavior largely agrees. Japan intervened twice in the currency market, and there is a big risk of the reverse carry trade playing out imminently because of the way the yen has acted.
In other words, nothing has changed here. I think next week might be pivotal. If utility stocks and gold prices weaken, we may be out of the risk-off short-term set up. If they don’t, then the market just sucked everyone in as volatility potentially spikes again.
Which way will it go? I’ll let you know in two weeks.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
