Stocks, Gold – Rebound Or Dead Cat Bounce?

None of Friday‘s intraday attempts to recapture 3,850 stuck, and the last hour‘s selling pressure is an ill omen. Especially since it was accompanied by high yield corporate bonds weakening. It‘s as if the markets only now noticed the surging long-end Treasury yields, declining steeply on Thursday as the 10y Treasury yield made it through 1.50% before retreating. And on Friday, stocks didn‘t trust the intraday reversal higher in 20+ year Treasuries either.

Instead, the options traders took the put/call ratio to levels unseen since early Nov. The VIX however doesn‘t reflect the nervousness, having remained near Thursday‘s closing values. Its long lower knot looks encouraging, and the coming few days would decide the shape of this correction which I have not called shallow since Wed‘s suspicious tech upswing. Here we are, the tech has pulled the 500-strong index down, and remains perched in a precarious position. Could have rebounded, didn‘t – instead of showing that its risk-on (high beta) segments such as semiconductors are ready to do well regardless.

That‘s the same about any high beta sector or stock such as financials – these tend to do well in rising rates environments. Regardless of any coming stabilization/retreat in long-term Treasury yields, it‘s my view that we‘re going to have to get used to rising spreads such as 2y over 10y as the long end still steepens. The markets and especially commodities aren‘t buying Fed‘s nonchalant attitude towards inflation. Stocks have felt the tremors and will keep rising regardless, as it has been historically much higher rates that have caused serious issues (think 4% in 10y Treasuries).

In such an environment, the defensives with low volatility and good earnings are getting left behind, as it‘s the top earners in growth and very risk-on cyclicals that do best. They would be taking the baton from each other, as (micro)rotations mark the stock market bull health – and once tech big names join again, new highs would arrive. Then, the $1.9T stimulus has made it past the House, involves nice stimulus checks, and speculation about an upcoming infrastructure bill remains.

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Monica Kingsley 1 month ago Author's comment

And what about calls for raising Fed funds rate perhaps even this year that you might hear thanks to the rising Treasury rates? As premature as the constant calls for significant (10+%) corrections. I haven't been buying these either in Jan, or Feb, and I'm not buying it in Mar. Besides, not that much time has passed since the last serious stock market correction really. And this correction's shape has been decided on Monday in my view, and it won't be even 5%...

Monica Kingsley 1 month ago Author's comment

Here we are, the smashing ride in stocks continues, and it paid off to ignore the corporate credit markets this time... Silver keeps running, yet commodities and gold retreated a little - but the dollar isn't surging. Telling signs...