There has been a flurry of events and information released recently, and it's easy to loose the grip on the big picture in this environment. So, here is the big picture, as I see it:
Face it, the stocks are in the strong bull market, period. Whether we are near, or at the top, of this bull market, nobody knows. However, the closer we get to the top, the stronger the uptrend will be. What we do know is that the stock market simply refuses to sell-off, even to a normal correction. With that said, the bull markets usually end with a recession. Thus, as a big picture analysis, it is important to track information about the recession probability, which leads us to the discussion of the bond market.
The Bond Market (NYSEARCA:TLT)
Historically, all recessions have been preceded by the inverted yield curve, when the yield on a 2Y TBond exceeds the yield on a 10Y TBond. So, rather than following the hard economic data release, I follow the market expectations about the recession embedded primarily in 10Y TBonds. So, recently, the 10Y-2Y spread had narrowed from 1.34% on Dec 21, 2016 to 1.04% as of April 27, 2017. The narrowing of the yield curve possibly caused the flat stock market over the last 2 months.
Yet, given that the spread is still healthy at around 1%, the stocks remained resilient, as the recession probability remained insignificant. With that said, the continuation of the yield-curve-narrowing trend towards the 0.5% level (as the 10Y Bond yields breach the 2% level) would flash a warning signal for the stock market, as the recession odds would significantly increase. Not at that point yet.
The US recession, at this point, would cause a nightmare for policymakers, given the lack of traditional monetary policy tools to fight recession. Most likely, the Fed would be forced to administer another round of QE, which would negatively affect the US Dollar. So, following the US Dollar can confirm the recessionary warnings from the bond market. At this point, a stronger dollar supports the US stock market.
Nevertheless, the Trump administration is talking down the Dollar. Further, the investors are waiting for the second round of the French elections and the signs from the ECB to buy the Euro, which could actually be a positive for the stock market. However, the Japanese Yen at this point is a clear risk-off currency, and a current rise in Japanese Yen, together with narrowing of the US yield curve, is a warning sign for the stock market, but not to the point where I call the top. For this, I need to see the Japanese Yen above the 1.000 level (currently near 0.90).
Gold is possibly the most important indicator in my big picture analysis. The primary driver of gold, right now, is the possibility of a US recession - while the interest rates are still very low. The possibility of "helicopter money" , which appears to be inevitably the ultimate tool to fight deflation, opens up the possibility of gold to rising beyond the highest expectation. So, at this point, rising gold prices signal the rising recession risks. However, the risk is still small - we need to see a decisive spike above the 1360 level to even start worrying.
Beyond and above all the news/headlines/releases/announcements, it is important to narrow down to a number of reliable market indicators to keep a firm grip on the big picture. I follow the absolute 10Y Bond yields, and in relation to the 2Y Bond yields, and confirm the implications from the US Dollar and Gold moves. The stock market trend is what it is - and right now it's a bull market, although, the technical correction is always possible. When things change, I will update.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.