Equities in Brazil traded higher again today with the country’s benchmark Ibovespa index rallying over 2% and capping off a 15-day 11% rally where the index has only traded lower three times.  Today’s rally also raised eyebrows among technicians as the Ibovespa, like a number of major US indices has broken its downtrend relative to the highs earlier this year. From a technical perspective, what’s not to like about Brazil?

One item may be the currency.  Brazilian equities have broken their downtrend from the late March high, but from the perspective of a US investor, the weaker real means that the gains aren’t quite as impressive as they are down in Sao Paulo.  After adjusting performance to account for the moves in currency markets, Brazilian equities have still rallied, but after today’s rally, they are only just now beginning to test the downtrend from spring highs. Don’t toast that Caipirinha just yet. Click here to learn more about Bespoke’s premium stock market research service.

While the rally has paused today, the S&P 500 has continued to press higher in the past week and is currently hovering near resistance at the late May/early June highs.  In response to those moves, investor sentiment has improved with the weekly survey from the AAII showing over 30% of respondents reporting as bullish. That is the highest reading since the first week of June when the S&P 500 was at similar levels to now.

Bearish sentiment is a similar story in hitting the lowest level since the first week of June as it has fallen back below 40%. The further 1.2 percentage point drop marks the fourth week in a row that bearish sentiment has fallen, and the full decline since the recent high of 59.3% on June 23rd now sits at over 20 percentage points.

In spite of those further improvements, there continues to be more bears than bulls as the spread remains in negative territory. As shown in the second chart below, the bull bear spread has now been negative for 18 weeks in a row.

In addition to the drop in bearish sentiment, neutral sentiment was also lower falling 1.6 percentage points down to 30.6%. That is the first time neutral sentiment matched bullish sentiment since May of last year. Click here to learn more about Bespoke’s premium stock market research service.

Initial jobless claims came in matching expectations at 260K this week, up from last week’s downward revision of 254K. That reading leaves claims 1K below the pandemic high set two weeks ago. Those levels are above the pre-pandemic range and consistent with where claims stood in the fall of 2017.

On a non-seasonally adjusted basis, claims have the benefit of seasonal tailwinds at this point of the year as the mid-summer peak works itself out.  Given this, unadjusted claims have dropped to 205.6K from the high of 258.9K two weeks ago.  Although that is a strong level of claims, it is above the readings from the comparable week of the year in 2018 and 2019.

Continuing claims are lagged an additional week to the initial claims number meaning the most recent reading is as of the week of July 22nd. Although initial claims had fallen that week, continuing claims moved back above 1.4 million for the first time since mid-April. Unlike initial claims, and as we will discuss further in tonight’s Closer, the deterioration in continuing claims has been relatively modest as current levels are not only well below levels from the two years pre-pandemic, but this week’s reading would still make for some of the best readings since 1970.    Click here to learn more about Bespoke’s premium stock market research service.

After what had to be one of the worst combined first halves of a year for stocks and bonds on record, July provided a respite as the S&P 500 rallied more than 9% and long-term treasuries, as measured by the BofA/Merrill 10+ Year US Treasury Index, jumped over 3%.  Even after those rallies in July, though, trailing 12-month returns for both asset classes remain firmly in negative territory and well below the historical average.

The chart below compares the S&P 500’s annualized total return over the last one, two, five, ten, and twenty years to the historical average for all other periods since 1928.  Historically, the S&P 500’s average annual total return has been a gain of 12.0%.  With a decline of 4.6% over the last year, the current period ranks in just the 19th percentile relative to all other one-year periods.  While one-year returns have been below average, it follows a period of strength for stocks which is evident by the fact that two, five, and ten-year returns are all still at least two full percentage points above their historical averages.  Over a 20-year window, however, the S&P 500’s annualized total return of 10.0% is nearly one percentage point below the historical average of 10.9%.  The last year has been bad for stocks, but it follows what has been a very good period for investors.  Click here to learn more about Bespoke’s premium stock market research service.

The experience of fixed-income investors has been an entirely different story.  While bonds, and US Treasuries specifically, are supposed to be considered a safe asset class, over the last year, long-term US Treasuries are down over 17.5%, and the two-year annualized performance is a decline of 14.2%.  Yup, that’s a cumulative decline of 26.4%- in Treasuries!  Longer-term, the performance of long-term US Treasuries isn’t negative, but with annualized gains of less than 2% over the last five and ten years and just 5.2% over the last twenty years, calling the recent history of investing in this asset class the dark ages, wouldn’t be an understatement.

It’s the way things always work out in the market. Just when everyone starts to think one thing, the complete opposite occurs. It happened in the US Treasury market yesterday when the yield on the 10-year traded down near 2.5% prompting some sell-side firms to suggest a move to 2% was in the cards.  24 hours later, though, yields have reversed higher, and at just under 2.8%, the 10-year yield is now closer to 3% than 2.5%.  After starting out the week with a rally of 2.22%, the iShares 20+ Year US Treasury ETF (TLT) pulled back over 2% Tuesday. You may be used to back-to-back 2% moves in the stock market, but they’re much less common in long-term US Treasuries.  Before this week, the last time TLT had 2%+ daily moves on consecutive days was all the way back in March 2020 at the depths of the COVID crash, and since TLT was launched in 2002, there have only been 16 other periods where the ETF had back-to-back moves of 2%.  Of those, just six went on for a third day, and only two of those (both in March 2020) went on to more than three days. Click here to learn more about Bespoke’s premium stock market research service.

The red dots in the chart below show every time that TLT had a 2%+ daily move on back-to-back days. Of the prior occurrences, the majority all took place during and in the year or two after the Financial Crisis, but besides that, the only other occurrences were in June 2016 (Brexit) and the COVID crash. We probably don’t need to spell it out, but prior back-to-back 2%+ moves in TLT have occurred during periods of short and/or long-term stress in the markets. Click here to learn more about Bespoke’s premium stock market research service.

It isn’t just individual days where Treasuries have experienced volatility lately.  TLT’s average daily move over the last 50 trading days has now moved to above 1% (red line), and since its launch in 2002, the only periods where its average daily move was higher was during the Financial Crisis (Q4 2008 through Q4 2009), after the US debt downgrade (Q3 2011 to Q1 2012) and during the COVID crash (Q1 2020). If you were looking for an August slowdown, Treasuries don’t look like they’re ready to chill.