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We have been talking about some troubling divergences in the market for the past couple of weeks. These have worked themselves out— Small and mid cap stocks are now outperforming the S&P 500 over the past week and month and Treasury Bond yields are coming back up.
Up until the past couple of days it was hard to imagine the stock market rally continuing with small cap and mid cap stocks doing badly and Treasury yields continuing to fall. Now that this has reversed it is hard to see anything derailing this rally over the next few months. Short term the market is now looking overbought so it is due for a pause. Longer term all bets are off when the Fed takes its foot off the gas.
The 30 year Treasury has now retraced 76% of the move it made earlier in the year as investors have rotated out of bonds into stocks. Even with this move iShares is still seeing net positive flow into Treasury ETFs. With the market looking overbought and Treasuries now looking oversold the market could be poised for a small rally.
Gold continues to look weak as there is no real need for save havens at this point.
This week we have sold US Dividend stocks into rallies. We are now holding a fair amount of cash across the board that will be put back to work into any weakness in the market.
We sold our Treasury bond positions in our income strategies but continue to hold them as a hedge in our growth strategies. With Treasuries looking oversold and stocks looking overbought I am still longer term bearish on Treasury Bonds but I like having this protection short term.