Why Bonds Just Beat Stocks

The bond market flashed a warning today that I haven’t seen in a very long time. Traders would rather own bonds than the S&P 500 (SPX) or the NASDAQ (QQQ).

The S&P 500 dropped about 90 handles into the close. Everyone will blame the hot CPI report.

I see CPI as the fuse. The powder keg was already sitting there.

Bonds sold off right after the CPI print. That’s exactly what you’d expect when inflation runs a little hot.

Then the bond market turned around. It recovered the full point it lost and tacked on another half point.

That rally makes no sense on an inflation scare. Traders were hedging.

The real selling came straight out of semiconductors. I’ve warned again and again that nothing saves this market if semiconductors come down.

I call today’s action duck and cover. Money rotated out of semis, the NASDAQ, and the S&P 500 to hide in bonds.

Breadth makes the picture stranger. The advance decline line finished positive with almost 60 products trading higher.

Walmart (WMT) and Costco (COST) both rallied hard. Walmart should take a hit if inflation were the real problem.

The S&P 500 fell 1%. The NASDAQ fell 2%, with breadth still positive.

Imagine the damage if the other 57 products start selling too. I’m watching for exactly that.

Here’s what I broke down in tonight’s video:

The week priced a $95 expected move. The S&P 500 has already covered all $95, landing right on the lower edge near 7716 that I drew last Sunday.
A break of roughly 20 to 26 points below that edge, around 7690 in the SPX, turns on hedging. That push could easily become a 2 sigma move.
The bond market lost a full point after CPI, then recovered it and added another half point. That reversal shows traders hedging their equity risk.
The VVIX took off today without reaching an extreme reading. The only extreme signal came from money moving into bonds.

Tomorrow, I’m watching bonds first. If they keep rallying, look out below for the S&P 500 no matter where stocks open.

I’m also watching the advance decline line. A falling S&P 500 with falling breadth would tell me the selling has spread beyond semiconductors.