Bounced Hard On Intervention
Bounced Hard On Intervention
Last week held the biggest bounce of the year AND biggest weekly bounce in 3 yrs, led to outsized gains across the board:
Russel 2000 +122.60 points or 7.5%
Nasdaq +913.50 or 6.4%
SP500 +208.25 or 5.0%
Dow +1633 or 5.0%
So now we should rest. Literally, markets should digest these outsized gains before figuring out what to do next because MUCH energy was expended for this expansion on support right into resistance.
For the next week, it is more is tactical: Between the auction of buyers and sellers, which will win in the short-term before we reverse to fill the gaps in the other direction.
We talked about all the technical levels in my live trading room this morning for all indices, but suffice it to say that SPX has gap fills above and below to fill, so MIND THE GAPS!
A break UP above 4376 will lead SPX north into 4401, with gaps above near 4500 + 4576.
A break BELOW of 4339.54 brings 4320, 4300, 4268.50, 4245.64 and 4195.95 gap fills below.
The question I asked October 26th: "Bounce Hard or Trounce Hard" was answered. We bounced hard on intervention from Yellen on QRA and expected Fad pause. Whether it continues has a lot to do with organic buyers trusting the new financial easing and Treasury liquidity, along with sustained valuations and softening US dollar and yields to support equities into end of year.
Keep in mind: Treasury will do everything in its power to keep USD weak and market sentiment up for the next 12 months.
But big picture, the issuance will only grow!
As for those looser financial conditions, we have many Fed speakers this week and Powell twice presenting. Will any/all push back or let the market assume the pause is in? And if they persist with "do nothing", how will inflation expectations respond, or will rising claims and recession calls grow louder making their job more difficult.
Remember: CPI next week means stocks will react in response to dollar and yield moves. The economic data is cooling: new jobs created was lower than expected as jobless claims rise for a 6th week in a row with unemployment rate pushing into 3.9% from 3.4% trough - reflecting downward revisions to the prior two months. ISM manufacturing employment sub-index fell into contraction territory.
USD Makes The Weather I see USD as over valued and as such will serve as a headwind for any durable bond bounce.
Falling DXY and softer yields may have served as a strong tailwind for equities last week, but it’s actually a warning for future weakness in equities and bonds.
Big picture, if stocks are not a good place to be and bonds are not a good place to be, then won't USD get supported? No. This time: as rates fall (especially with Fed rate cuts surging), demand for USD and UST will fall together and this will be negative for risk assets.
This is not your credit event/crisis US crowded long, because of Fiscal Dominance.
And market can’t price THAT in with the tricks Yellen is playing and Fed is forced to defend.
No wonder money is going back home/abroad. Wonder if there will soon be a rotation back into the yen, if my thesis proves even a little bit valid.
No landing or soft landing from wage inflation or US govt spending as stimulus cannot continue the growth mantra as corporate revenues and margins slow - and as they plan and expect them to slow. Seriously, how long can Fed/Treasury hold the fort? Six months?
But since VALUATIONS are too high to chase here and long-duration bonds aren’t cheap enough to buy safely, more likely USD won't be demanded.
The market is asking UST holders to compensate for “the fall of money”, but market doesn’t see it yet.
And that is going to help Yellen keep equities correcting in time more than price until the next Treasury auction disappoints.
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