The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Was it just a dream?
The Treasury market didn’t reprice much today but the stock market sure did. Meta disappointed but Microsoft didn’t. That confused equity markets after the close. By the premarket today, equity investors went into dip-buying mode and they saw the yield-driven selloff from yesterday as an opportunity. The S&P opened up about 70 points and wandered around all morning. Just before lunch, the index caught a consistent bid and we really ramped into the close. Stock investors erased yesterday’s damage.
The big question of whether the stock market with come to the bond market or vice versa remains. Today the stock market bounced and took off like the good old days of this Spring and most of last year. Whether this is because Microsoft rejuvenated the AI investing theme or that the stock market projects falling inflation is unclear. In time, we may learn how much is from column A and how much is from column B. For today, all we can state is that the market is bullish, very bullish. This does not look like a dead cat bounce nor a timid response to yesterday.
There is a technical level above us right now, the 50-day moving average at 7469, that comes into play. If the stock market does have a new sentimental catalyst or two at work, those will likely stick around for a while and take us to new highs. The first step in that process will be to get all the chart-watchers on board that there’s a new leg to the trend in town.
I suspect that if we break out above the 50-day shortly, we’re off to the races again.
The caveat here is the Treasury market. If it just hangs out up here, the stock market appears willing to ignore it. However if yields keep rising, the stock market cannot resist that indefinitely.
Is the bond market treading water or briefly pausing on its way to higher yields? Yields have climbed a lot, especially in the face of dropping inflation data. Is the Treasury market over, or under, pricing the inflation risks between now the next FOMC decision, on Sep 16 by the way.
The Fed Funds rates market prices a hike then with 66% probability. That’s pretty high. The US 2-year currently yields 50 bips more than the Fed Funds rate. That’s significant. That market expects hikes over some shortish horizon.
The inflation debate is playing out in real time. Stocks are bearish on it and bonds are bullish. At some point, there will be a reconciliation. Right now, the two markets are diverging.
Will either second guess itself before the next big inflation release? CPI releases Aug 12. We get other price info along the way but that’s a vital data point.
See you tomorrow.
-Mike
Visdom Market Commentary
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