Last week was another difficult week for stocks despite Friday's sharp rally. Global equities were under pressure for the first four days of the week, as energy prices continued to decline and Janet Yellen provided no indication that the Fed was changing its direction. Gold and U.S. Treasury bonds were the big winners for the week as investors flocked to safe assets.
So will Friday's rally continue? I think it may last for a few days as we did see some extreme, oversold conditions in the market on Thursday. I still believe this rally should be sold, as I expect new lows to be made in the next month.
This week I will be watching the news and market action from China closely, as the markets were closed last week and the most recent market downturn was kicked off by concerns about Chinese growth. Also keep a close eye on U.S. economic data, as the market has been confirming a slowing in U.S. growth.
I still like being short U.S. Treasury bonds and expect credit spreads to stabilize at these wider levels. Spreads now look cheap compared to equities. Corporate liquidity continues to be robust with limited need for refinancing. If credit spreads widen significantly from these levels, I would become even more bearish on U.S. equities as credit spreads have been a good leading indicator of equity weakness.
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