by Bryan Perry
February 14, 2023
Just as this column is emailed out to all our readers, the pivotal CPI report will cross the tape on Tuesday morning. It will either confirm the fears in the bond market – that inflation is sticky – or provide a basis for buyers to resume pouring into growth stocks. Last Friday’s session was very mixed, with a number of crosscurrents at work. This is when letting the charts do the talking is most useful. When there is rampant confusion in the air – such as now – the technical picture helps to provide clarity. First, look at the dollar:
After a healthy sell-off, the U.S. Dollar Index (DXY) got a decent bounce last week and rallied back to its downward-sloping 50-day moving average (MA). That move may be tested this week. The bulls want to see the dollar continue its downtrend, as it translates into bigger profits for large multinational companies.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Another big contributor to the five-week rally that ushered in the year were lower long-term bond yields. Both the falling dollar and lower-trending yields helped fuel the ‘risk on’ sentiment that propelled the Russell 2000, S&P 500 and NASDAQ above their respective 200-day MA’s on heavy volume.
As of Friday, the S&P backed and filled to its 20-day MA and is still constructive.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The same can almost be said for NASDAQ, where the mega-cap tech stocks posted a set of Q4 top- and bottom-line results that reflected slowing revenue and earnings growth. But investors believed a peak in rate hikes and trough earnings have been priced in, so they bought the tech leaders, trying to anticipate a Fed pause followed by a pivot. Momentum fed on itself, and short covering fueled a strong move, taking the tech-heavy index up through its 200-day MA, followed by a week of consolidation.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
At the same time, the week ended with the market feeling vulnerable to rising selling pressure against a bond market that saw the 10-year yield reach 3.74% from 3.33% in the span of a week – its highest level in a month. So much for the warm and fuzzy interview last Tuesday between Fed Chair Jay Powell and David Rubenstein that triggered a failed attempt for the bulls to take out 4,200 for the S&P 500.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The move off the 3.33% 10-year shows the intermediate-term uptrend remains intact. Here too, the bulls want to see the yield below 3.35% to break the trend line, which would invite fresh buying of equities.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This sudden gap higher in bond yields removed the steady bid from the growth trade, but has yet to undo the bullish charts that underly the big-cap software sector, as represented by the iShares Expanded Tech-Software ETF (IGV, first chart), and the VanEck Semiconductor ETF (SMH, second chart).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Investors went into the weekend wondering if this is a healthy pullback, or the start of something bearish. Professional opinions are all over the map, with very little consensus, from what I see over the weekend.
One new development that went largely unreported – which I believe triggered selling in the bond market – was a shift in sentiment on Federal Reserve policy emerging in the trading of interest-rate options, where several big wagers on the central bank’s benchmark rate reaching 6%, nearly a percentage point higher than the current consensus, showed up last week. This course of thinking runs radically counter to the current school of thought that the Fed is near the end of its tightening cycle and implies further hikes.
These rate increases could last until September. Bloomberg reported on February 8 that preliminary open-interest data from the Chicago Mercantile Exchange confirmed an $18 million wager placed Tuesday in Secured Overnight Financing Rate (SOFR) options, set to expire in September, targeting a 6% benchmark rate. That’s almost a full percentage point more than the 5.1% level for that month currently priced into interest-rate swaps. That $18 million trade would pay out $135 million if it just happens to be correct.
The swaps market is still holding the view that the Fed’s benchmark will peak at 5.2% sometime around July and begin to slide later in the year. At the same time, this eyebrow raising set of wagers on a 6% overnight rate was based on the “hot” jobs report and Powell’s comments during the Tuesday interview, suggesting the latest monthly jobs numbers may necessitate more tightening than previously anticipated.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Bloomberg continues: “It’s the latest in a series of big wagers that show no signs of letting up even as the Fed has slowed down a tightening cycle that has been the fastest since the early 1980s. Last month, SOFR options bets made CME group history, recording the biggest inflows on record into any product traded on the exchange. And it marks a sharp turnaround from the big theme in the market last week, before the strong jobs data came out: Traders were betting on sharp rate cuts in the second half of 2023.”
This type of out-of-step trade with conventional thinking can act as a trigger mechanism that excites the AI-driven algo-based funds that rule daily volatility, making triple digit intra-day point moves for the Dow now almost a daily occurrence. For those looking for a reason as to what drove yields up so quickly on the long end of the yield curve, I think this set of new wagers on more rate hikes was the catalyst.
With the CPI due out as we go to press, Producer Prices out next Thursday, and the Fed’s favorite personal consumption expenditures price index (PCE) due out Friday February 24, investors and the market will have plenty of inflation data to work with. At this juncture, charts for stocks are constructive, and not so much for bonds, but that can change in a New York minute, depending on the data.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
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New Realities in the Energy Patch Promise Higher Prices
Income Mail by Bryan Perry
Is This a Healthy Pullback, or Resumption of Bear Market Selling?
Growth Mail by Gary Alexander
The State of the Market & Economy at Mid-Quarter
Global Mail by Ivan Martchev
The Fed Does Not Need to “Do More”
Sector Spotlight by Jason Bodner
A Valentine’s Day Market Tip
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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