Was that it?
I don’t think so, but these things take time. The parabolic move was unsustainable and corrected sharply but only back to the primary price channel that started after the central banks saved the market in early 2016. The SP500 precisely bounced off our lower price channel (which happened to also be its 200-day moving average) during trading on 9 February. It does not show up in our daily chart below, but it was amazing to behold.
It was a good bounce and we are watching where it ultimately lands. There is a lot of technical support for the SP500 to settle back into this price channel. At least for a short time. As a reminder, the SP500 tracked by the TSP C fund makes up about 80% of the US stock market value. So this is why we like to watch it first and foremost.
I believe many narratives have changed recently and investors will wake up one at a time – the smart ones first. The Federal Reserve has shifted from market propping to telling us that the 10% correction was “small potatoes.” I can’t wait for the big potatoes to arrive, or watermelons for that matter.
Meanwhile, the 10-year Treasury keeps ticking higher driven by our same friends at the Fed who “are worried about inflation” ticking above their arbitrary 2% consumer inflation target. This new narrative helps them to justify pushing interest rates higher – not to tighten monetary policy but to finally end extreme emergency level monetary policy.
Yields look about 2-3 weeks away from ringing that 3% bell. But there may be resistance.
You don’t really think inflation is driving interest rates here do you. Seriously, they have negative interest rates in Europe with close to 2% inflation. The central banks have been crushing savers and pension funds in an attempt to get them to blow their retirement savings on risky investments in hopes of boosting the economy a tad. This market cycle is all about the central banks so forget about corporate profits or tax cuts.
The driver of US interest rates today is the deluge of bonds that are going to be hitting the markets this year and next. And they will require a lot higher rates for buyers to come out of the woodwork since the Fed has decided to stop monetizing market speculation.
So where will this money come from to buy all these deficit bonds?
Imagine if the 5-year CD started paying 4-6% again. Maybe grandma would sell some of her Tesla stock and start earning interest income again after 10 years of central bank financial repression. And then after the stock market takes a few hits, Grandpa will join her. And that giant yield-suppression rotation out of safe investments into the stock market begins to reverse… don’t be last.
But until rates settle at a higher level, capital losses are guaranteed in bond funds due to rising interest rates. That is just how they work. So maybe this is why the dollar is diving (foreign investors sitting out the bond sell off). And maybe the stock market has support in the sense that investors are avoiding shifting funds to the bond market for now.
Then again, I like to remind members that the stock market can drop just drop overnight. The market could open 5% lower and no one gained on the over-night move. Or 50% lower if they allowed it. They don’t.
BTW, I’ve read the corporate stock buyback desks at the major brokerages were very busy during the market sell off. One wonders how much of their buyback authorizations corporations burned through to save their
CEO stock based compensation stock’s value this month.
We have *not* seen a large RISK OFF move yet, only a “small potatoes” 10% correction.
Market internals are surprisingly good if we ignore the rapidly rising Treasury yield. And over-bought conditions have been worked off. But I think there will be some more wake-up calls in 2018. I would think blasting through 3% on the 10-year would set some alarms bells. We may see soon.
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