The Overvalued Into The Less Overvalued Trade Continues

It was a mixed day for stocks, with the S&P 500 up and the NASDAQ 100 down. We continue to see this rotation trade taking place. Some of these “value” stocks aren’t the value they may seem to be. Still, it is more of a trade out of the overvalued technology and discretionary names into the less overvalued industrial, materials, and financial names.

I wouldn’t be surprised if we saw the S&P 500 fill gaps at lower levels the rest of the week. Today it appears we completed a rising wedge on the intraday charts and failed upon retest resulting in the breakdown. Based on that, a drop back to 3,875 seems reasonable and probably a push lower back to 3,820.

It seems there is too much resistance at this 3900, while option positioning appears to be creating a headwind. Unless we gap sharply higher tomorrow, above today’s highs, I think the likelihood is that we trade down the next couple of days.

US 10-Year

10-year yields continue to trend higher, despite trading flat today. The CPI data came in mostly in line, while the core readings were 10 bps below expectations. The results were not enough to move the needle.

So the interesting thing will be what happens with the PPI on Friday. It is expected to climb by 2.7% on a year-over-year basis. That is 1% higher than today’s CPI. If that type of trend continues, it will imply that producers of goods cannot pass along their rising cost to consumers; what happens to margins at that point?

I tend to think that inflation fears overall will die down by the late summer or fall, but in the meantime, the market could have a field day with margin compression worries, especially with earnings multiples at these levels. Just thinking about what comes after the inflation worries.

Nvidia (NVDA)

Nvidia tested resistance today at $520 and failed, trading lower by 40 bps. The stock probably has further to fall, and it wouldn’t surprise me. The valuation is high, and the more rates rise, the lower it will need to go.

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

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