Euphoria Continues, But Watch For Reductions In Leverage

Overview:

The S&P 500 (SPY) continues its euphoric climb as volatility continues to rise, which is a potential indication that the current rise is being driven more by emotion and less by fundamentals.

Investors have become addicted to bad economic data as "good" data points are being received negatively by investors.

The main fear in the market is not weak economic data, but fears of a reduction in the Fed's monetary policy.

However, global economies still remain weak and prices in key commodities used in manufacturing still remain soft.

Risk for US investors lie in the amount of leverage being used.Historical weakness during the summer months may cause portfolio managers to reduce leverage in their portfolios.

Details:

The S&P 500 index is still trading in a euphoric trend - essentially rising at a faster rate then the trend of the past three years:

source: Riverbend Investment Management, StockCharts

Meanwhile, volatility has been steadily rising during the past few weeks, a potential indication that the current market rise is being driven by emotion and not fundamentals.

After being spooked by tapering comments from the Fed, the bond market (TLT) is showing signs of divergence - indicating a potential reversal from the current drop in bond prices:

Copper prices continue to show weakness, which is not a sign of strong economic recovery.

Global weakness in this key component of manufactured goods is a sign that the Fed should not taper at this point of the cycle.

Investors still need to remain nimble as margin levels show high levels of leverage in investment accounts:

source: dshort

Historical weakness during the summer months may give portfolio managers a reason to reduce leverage in portfolios:

source: Business Insider