Stocks Dropped On May 12 As Interest Rates Surged

S&P 500 (SPY)

Yesterday, stocks slumped, with the S&P 500 falling by just over 2.1%, while the Qs (QQQ) dropped by about 2.6%. Overall, it was a very weak day, with the Russell 2000 down 3.5%, there was no sector spared, except energy.

It was actually a pretty important day for the S&P 500 because we closed below the March 2020 trend line for just the second time. The last time we closed below the trend was on March 4. So if we continue to move lower tomorrow, it would indicate that the trend line is broken. It could be a significant shift in long-term trends. We also finished the day just above the 50-day moving average.

Ideally, I would like to see the index fall back to that 3960 level I spoke about in the middle of April that the market chose to ignore. It would amount to roughly 62% retracement of wave 5 move higher. It would make a nice place also for the completion of the first wave lower; we can call it “A.”

It would take the index to the base of the broadening wedge pattern formed in the chart around 3,800 over time.

Russell 2000 (IWM)

The Russell 2000 is very close to breaking the next line in the head and shoulders pattern.  A drop to 2000 would be the next level of support. However, it is likely that would only be the first stop of a much lower trip.

I know many people are making calls for the market to go higher or buy the dip, but I believe rates are just beginning to go higher, with the 10-year potentially moving to as high as 2.35%, with or without inflation. The economy is recovering, GDP growth should resume either in the second or third quarter of this year, and rates on the 10-year should move higher. The 10-yr breakeven inflation rate of 2.56% implies a 10-year nominal rate of 2.5% at some point unless the 10-Year TIP is permanently fixed at -86 bps. Maybe that is the Fed’s plan, but otherwise, I can’t see how the TIP doesn’t rise back to 0% at some point. The 10-year nominal rate has much further to go, in my opinion.

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Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information ...

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