Market Stumbles As Rising Rates Undermine Outlooks

Sometimes, things don’t work out “exactly” as we plan. Such was the case last week, as we had expected a reflexive rally following the selloff previously. As noted in last weekend’s newsletter:

“Currently, the money flows remain positive, but ‘sell signals’ are firmly intact. Such suggests downward pressure on prices currently.

We do expect that market will likely muster a short-term oversold rally next week. However, the risk of a continued correction in March is likely if money flows deteriorate further. It is advisable to use any rallies to reduce equity risk and rebalance allocations accordingly.”

While we did get the expected rally on Monday, it immediately reversed. The middle of the week was rather brutal to the previous “momentum” trade. Such did not give investors much ability to rebalance without “panic selling” the low, which occurred Friday morning.

The good news is Friday’s mid-morning reversal did manage to keep the S&P above the 50-dma support level and money flows positive, albeit just barely. While the money flow index deteriorated further this week, and as we suspected, it is now rather profoundly oversold.

Longer-Term Sell Signal 

More importantly, while the short-term money flow index is very oversold, the longer-term index remains on a confirmed sell signal. Such suggests that downward pressures remain for now, and any reflexive rally should get used for rebalancing risks.

The dichotomy between the daily and weekly charts suggests we may well see a rally in the short-term, but another correction following. The last time we had the current setup with our indicators was in September and October of 2020, which provided two 10% corrections before the consolidation process was over.

We continue to suggest some caution. Despite media claims to the contrary, higher interest rates will matter, as we will discuss next. More importantly, they tend to matter a lot.

Jerome Powell Disappoints

On Thursday, Chairman Powell spoke, and the bond and stock markets listened closely. Higher yields are becoming a headwind for stock prices. The biggest question on investor’s minds is when the Fed will stop bond yields from rising?

We suspect the Fed will take a page from the Ben Bernanke playbook and audible to “Operation Twist.” sooner than later. Michael Lebowitz is writing an article on this issue which we will release next Wednesday. However, this “sneak-peek” may prove useful to our analysis today.

“The Fed must be keenly aware rising interest rates will choke off the fledgling economic recovery. The likely solution to keeping the recovery rolling dates back to the 1960s when Chubby Checker and the Twist were all the rage.

As interest rates rise, the odds of Operation Twist 3.0 increase. The Twist can arrest rate increases without altering the current QE pace of $120 billion per month. The alternative option, increasing the amount of QE, might cause rates to climb further due to the inflationary implications of such actions. The Twist allows them to manipulate markets without increasing their footprint.

Operation Twist may be bullish for equity and fixed income markets but we must ask: will investors dance with the Fed or will they fear something is not right?” – Michael Lebowitz

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