A spike in bond yields and inflation worries spooked investors late last week, putting pressure on stocks and commodities. As expected, the financial media stoked fears, with a constant dire drumbeat during the Thursday and Friday trading sessions. This hightened concern helped the volatility index (VIX) tag a short-term high. It later faded into the market close for the week. That said, gold and silver showed no signs of a safety trade, finishing below the highs of the week.
Summary
Leading Growth Stocks Were Weak
The Nasdaq-100 Index beared the brunt of the weakness, falling 4.84% for the week and closing below the 50d moving average. Most growth and big-cap tech stocks retreated, finishing a little more than 8.00% from all-time highs.
Trend followers will note:
- The trend line from the March lows is breached
- Price action is below the 50d moving average
- Momentum (MACD) is shifting
- Volume was above average – distribution week
- Pivot lows are holding – for now
Big-cap growth stocks have already pulled back sharply over the course of the past two weeks. Therefore, if the the bearish momentum continues, we’d probably add to our SQQQ hedges enlisting the Fibonacci retracements in the chart above for reference targets.
Mixed Signals Warrant Further Study
Despite the weakness in the leading growth stocks, there are underlying bullish signals that need to be considered. For example, yields rising means bonds are being sold, proceeds that could find their way into equities. Leading economic indicators like copper are at highs. Industrial production is in a bullish cycle, showing no signs of exhaustion. Additionally, the strength in transports indicates “goods” are being manufactured and delivered to the end-user. This suggests sector rotation.
“Be careful thinking the market is telling you something in isolation (one chart).” – Tony Dwyer
Copper, a leading economic indicator is outperforming gold. It has yet to peak and gold has yet to bottom. The latter suggests no safety trade at this time. The (RoC) in the industrial production cycle (lower panel – left most chart) is about to turn higher and the CRB index (right most chart) appears ready to breakout of a decade long slide. Click to enlarge the charts below.
Industrial production is in a bullish cycle. Momentum is shifting. Click to enlarge.
The CRB Index is bullish. A breakout would signal global economic improvement.
Are Bond Traders Worried?
Consider the chart of yield spreads. Bond traders were positioning for the coming turmoil shortly after the start of 2020. News of lock downs exascerbated the concern with yields spreads reflected in the chart. So far, it does not seem bond traders are concerned with the pop in yields on Thursday.
New home starts are also progressing nicely. The indicator rebounded from Covid-19 levels back above the mean, the red shaded levels. Inflation hasn’t created overbought levels like we saw at the peak in 2006. Did you buy a home then? We did, and it took 10 years to get back to a level where we had a profit. We sold our home and moved to sunny Mrytle Beach, South Carolina.
To be clear, in the short-term, we could see more volatiltity and we could endure more selling. We could also see dip buyers, seizing on the opportunity for discounted prices. Let’s reassess on Monday when we start the first week of March trading.
And one final thought, thanks to Brent over at spotgamma.
“If there is little news over the weekend we think Monday will bring a rise in markets as that elevated implied volatility subsides. This would likely bring a quick retest of the 3900 level. Should futures pierce 3800 (major SPX gamma OI) into Mondays open then we anticipate a much larger, extended drawdown.“
Join us Monday in the trading room for our LIVESTREAM broadcast during market hours, as we navigate the current environment. Watch, listen, and trade from 9:20 AM to 4:15 PM Monday through Friday.
Happy Trading,
Vinny
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