Sell Now, Buy Later
CLUB/EDGE client post from earlier today. Focus on Risk Happens Fast & 10Y yield as the tell. Also, gold & silver update with dollar/yen!
Outliers Revert With Velocity...
The 10Y yield spike I predicted/posted premarket on Fed Day September 18th should be finished soon. Why do I say that?
POSITIONING as reason-for-season has likely run its course in the short rate unwind. Even Warren Pies posted today that this aggressive move is just the unwind of "recession insurance" buyers. ;-)
MOVE index has moved from 90 to 130 as 10Y moved from 3.6% to 4.26%. Unless 10Y yield gets above & stays above 4.36%, I am expecting both to fall.
YELLEN will come in October 31st with QRA no doubt in favor of bond support, because it is right before both the election Nov 5th AND the FOMC decision Nov 7th.
Ironically, just as yields spiked higher from Fed cutting 50bp last FOMC, it wouldn't surprise me one bit if bonds now base sideways into the next FOMC decision and then continue higher. Translation: bonds get defended soon.
But not before equities start worrying about rising yields and dollar.
Monday and Tuesday and Today/Wednesday I noted in my live trading room this morning that we finally have selling, but it looks like garden variety selling, as we needed some mean-reversion from extended stocks/sectors/indices.
Floundering Is Healthy
It was clear that my #1 breadth indicator showed selling under the surface starting Monday at 11 AM ET, with net selling absolutely picking up same time and continuing.
QQQ is nicely dumping back to the 21D as I write - basically 496 rejection back down to 486 support on weekly.
Ditto with DIA, coming back to 21D on way to 10W.
SPX looks stuck on 5800, and yet, SPX 5841 triggers negative gamma, where dealers are forced to sell lower/buy higher. The 21D hasn't even been tagged and I still have 5767 as most likely target.
But in general, I would call this EXPECTED and WARNED.
VIX needs to get/stay > 19.29 to really press market shorts intraday and 23.76 to get really in play ala early August redux. But for that, we would most likely need 4.36% on 10Y yield.
The impact of higher interest rates on equities becomes noticeable after a sharp rise in yields. Historically, a 2 standard deviation move in the US 10-year yield (around 60 basis points over a month) signals when stocks start feeling pressure. Currently, with yields moving up ~50bps month-to-date, the tipping point seems to be around 4.30% for stocks.
(GS, Nocerino)
For now, I expect SPX break of 5815 to target 5738 with overshoot to 5670 before buyers step back in.
I also mentioned short SMH today below 250.62 into 244.62, but after this weakness finishes, we will go back and tag 272.46. It's not IF just WHEN!
Also, staying long NVDA via that financed call spread for DEC allows for this shake-n-bake at the same time I am expecting higher prices into year-end.
As for flows, Cem Karsan reminds that we are in the "window of non-strength".
And floundering can be healthy.
Meaning, next two weeks into Election & FOMC risk can equal profit taking!
So folks are selling now, but very likely buying later - despite election drama, earnings growth lowest in 5 years, while S&P at 23x EPS and option flows continues to be max bullish.
BUT: higher rates - and I'm specifically rereferring to the 10Y yields getting/staying > 4.36% this month - would actually be deflationary to risk assets and actually help pull forward risk of recession.
Gold & Silver Update
I posted these charts for clients yday under #swing channel in slack with this warning...
"GLD, SLV, GDX are running into BRICS summit this week. Not a bad idea to protect if long should profit-taking kick in."
It kicked!
I also mentioned USDJPY above 152 yearly resistance would trigger VIX and be gold bearish, for now.
And the reverse is likely true.
