3 Things To Weigh With S&P 500 At 2,000

August 27, 2014

3. The trajectory of Treasury yields is a red flag to bulls, and suggests that this market could go either way forward.

As the S&P 500 climbed to 2,000, yields on 30-year Treasurys slipped to their lowest levels of 2014, hitting 3.13 percent this week. They are now down more than 21 percent year-to-date as demand for the relative safety of long-dated high-quality U.S. debt remains high.

To that point, if you look at the SPDR S&P 500 ETF (SPY | A-98), it has actually underperformed the iShares 20+ Year Treasury Bond ETF (TLT | A-85) so far this year, as the chart below shows.

SPY_Vs_TLT_YTD_Perf

Chart courtesy of StockCharts.com

That’s vastly different from their respective 2013 performances, when SPY rallied 32.2 percent, while TLT slipped 13.4 percent, and by most accounts, a surprising turn of events.

Remember that coming into 2014, just about everyone was looking for yields to slide in anticipation of a Fed rate move that now seems to be postponed because the economy—it turns out—is not as hot as we had hoped.

Inflation remains practically negligible, growth numbers are a far cry from expectations, and the global economy is nowhere near out of the woods yet. Also, geopolitical hot spots abound, and deflation is just as much a risk as inflation is at this point—particularly in the eurozone.

“We would normally be looking at Treasury yields being much higher in a market like this,” Citrin said. “People want to make money, but they are less myopic than they use to be.

“They are acutely aware of downside risk, so they want to buy stocks, but they are cautious, and they are hedging that exposure,” he added.

In the end, the S&P 500 at 2,000 could prove to be a motivating factor for either side—bulls or bears.

“It has the potential to drive us one way or the other,” Citrin said. “If we rally from here, it could encourage the bulls, but if we fail to hold at these levels, it could trigger a serious correction. It really depends on what happens from here.”

 

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