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“All I’ve ever wanted is an honest week’s pay for an honest day’s work.” — Nat Hiken
Lions, Tigers, and Bears … Oh, My
That was as broad as an equity market beat-down gets; 11 sectors in the red. The S&P 500 saw its worst day since May. The stock market gets the headlines, but this is really not so much about stocks, is it? This turbulence in the force is being generated in the bond market. Not to mention North Korea, and I don’t see that particular negative passing quickly. The U.S. 10-year now yields as much as it has at any point over the last eight weeks. German Bund yields are at year-and-a-half highs. Yields have risen across Europe. Even Japanese paper has been slapped around a bit, though the Bank of Japan has been far quieter in public than have speakers from other central banks. I just have one request. Please just don’t call this a yield rally. That drives me nuts. There is nothing about this that smells like a rally. Bonds have been selling off, and in response to the expected headwinds that higher interest rates present, so have stocks. Period.
The most recent catalyst for harvesting some sovereign debt came from the ECB meeting accounts, which were rather hawkish. The ECB will meet again on policy in two weeks, about a week ahead of the FOMC. I will tell you this, they better do more than shrug their shoulders at that meeting. German 10-year paper yielded more than 0.55% yesterday, which was an 18-month high, and those yields have stretched higher this morning. Then there was the weak-ish auction for the French 30-year bond. Coordinated tightening across the globe? Maybe. Don’t they all eventually mimic each other anyway? If not coordinated, then correlated tightening across the globe? At least correlated talk. No backstop. No Bernanke/Yellen put. No Draghi put. The return of “normal” volatility? What was once considered normal will seem severe to less seasoned traders. Will all of these tough-talking central bankers get to where they are all actually tightening policy at the same time? They will all at least get to the doorstep, and that will be enough to cause continued volatility. The VIX is off the mat, and it’s probably going to be throwing both fists.
The broader equity market’s trend is still intact. Just barely. The rising yields have proven to be a catalyst for an equity market scalping. The S&P 500 closed last night at 2409. The 50-day SMA (Simple Moving Average) currently stands at 2413. Now, before running down the street in front of your home, warning the neighbors, this line has been pierced before, as recently as last week, and in fairly severe fashion as recently as mid-May. The 14-day RSI (Relative Strength Index) is running at its softest level since that mid-May selloff, but has not yet approached an oversold reading. The MACD (Moving Average Convergence Divergence Oscillator) gave us the bearish crossover that we all watched for on June 19 (about a week after the Nasdaq Composite sent us that signal), and has yet to come close to re-crossing, at least when the standard values for the moving averages are used for that equation. Even when using the Pitchfork model (one of my faves), it does not matter whether the model starts with the election night selloff in November, or the early 2016 lows; the lower bound of the model has been breached.
What does this all mean to us? Am I scared? No, but don’t go by me. If I have access to clean drinking water, I’m set. We almost certainly can count on more volatility. Although I still like several names in the tech space and will remain long for now the likes of Lam Research (LRCX) , NVIDIA (NVDA) , and even Intel (INTC) , I will proceed with caution. This sector is where even those late to the harvest still have profits. They will reap when they get nervous. They will get nervous.
The problem for the S&P 500 is that we are sitting on support right here. This level right above 2400 provided repeated resistance both late in the winter and then throughout the first half of May. That would lead me to think that we at least see some kind of fight here. This spot cracks though, and we can see this index give up another 40 points or so real quick, and then maybe another 40 points once that fight is fought. Rattled? No. You shouldn’t be. You should still have a reason for every action taken, and fear is not a reason for capital redeployment. I think that equity markets will regain their footing, but between today and that day, you might have to be tougher than you thought. This is not an easy game, and not a lot of trader types have a lot of experience with this, which could exacerbate negative sentiment in the short to medium term.