MLR - PMP 5/19/14

Published : May 19 2014 at 8:38 ET

Major averages rose Friday on mixed volume. Treasury yields fell again, with the 10-year yield at its lowest level in nearly seven months. This reflects the likelihood that the Federal Reserve will keep rates low in a slowly growing global economy according to the world's largest bond fund manager Bill Gross,

“If the new neutral policy rate is 0% and the Fed achieves its 2% inflation target, then the 10-year Treasury should trade at close to 2%. However, because of the large uncertainty as to what the New Neutral rate should be, I would not expect it to trade there,” Gross said.

With anemic economic growth over the next three-to-five years, rates should stay at record low levels for a portion of this period, suggesting that low rates could continue well past 2015. This could keep the QE-engine in place but whether stock markets continue their bullish rise which began at the inception of QE in 2009 is the question, especially due to the current correction which has been the most pronounced and damaging to indices and leading stocks. The notable divergence between major indices also is cause for concern.

Further, the Russell 2000 has broken under its 200-day moving average as evidenced by the risk off nature of the current environment. The Russell 2000 broke below its 200-day moving average twice in 2012 into no-man's land territory but was quickly pulled back up above its 200-day moving average due to the QE effect which pushed other major markets higher. Nevertheless, MDM came close to switching out of its signal on Thursday but noticed a slowing in selling pressure as the market attempted to gain traction. It remains on close watch.

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