WASHINGTON. Stocks opened down at the opening bell on this fine, autumn Columbus Day. At least the sun is shining here in The Swamp today, clearing out the steaming effluvia left over from this weekend’s disgusting array of Soros-funded anti-Kavanaugh “protests.” But back in New York, it’s traders and investors that still have their bullish knickers in a twist. Yes, it’s Bears vs Bulls, Day 3 as last week’s outburst of selling mania finds the Wall Street #Resistance against the Trump Rally entering its third consecutive contest.
Stocks briefly attempted to rally Monday after taking a -200 point Dow header during the morning’s initial wave of trading. But after spending a few precious moments in the green, as of 11 a.m. ET, all three averages are dropping again, between 0.25 and 0.6 percent. CNBC comments on the current action.
“Interest rates were on a tear last week after the release of several pieces of strong economic data. The benchmark 10-year Treasury note yield rose to above 3.2 percent from around 3.06 percent. The 10-year yield also hit its highest level since 2011 last week.”
Could it be interest rates that are really damaging Monday markets?
While the market is still experiencing some political hangover from the Democrat’s latest effort to Jump the Shark politically, traders and investors actually remain far more focused on interest rates, which jumped bigly once again Monday morning. The bellwether 10-year U.S. Treasury bond is up 0.38 percent at the moment to stand at 3.233 percent.
For investors who don’t fool around too much with bonds, that’s a pretty big move for one day. Worse, it follows equally large moves that hit the bond market late last week. But it marks the return, unfortunately, of those long-dormant bond vigilantes that love to throttle stock market bullishness when it’s nearing its peak. It’s these usual suspects that seem to be mounting this week’s Wall Street #Resistance movement meant to drive the bulls out of town. Bears vs Bulls. Sounds like a football game.
Anyway, as we’ve noted many times before, it’s an axiom that when interest rates go up, bond prices go down. So naturally, rather than get caught in the current bond selling tsunami, investors are starting to dump their own bond holdings. Which, of course, exacerbates the selling tsunami. Reactive lemmings are generally the ones causing large trading moves like this, but what can you do? It’s human nature. (And the machinations of the bond vigilantes.)
More Fed history
But there’s also that small matter of cause and effect. Since the Fed began its lengthy attempt to repair markets, circa 2009, it’s kept interest rates low, low, low, at least for rich people. The idea, to some extent, was to get them to re-deploy those cheap dollars back into the near-dead stock market, giving at least some capital infusion to the nearly-dead corporate sector.
This worked, magnificently on the whole. And would have worked better had the Obama administration and a mostly Democrat-led Congress chipped in instead of socializing medicine and working tirelessly to “fundamentally transform” America into a socialist paradise.
But, whatever. The Trump administration has finally managed to administer Recovery Part II by drastically lowering corporate and personal taxes, making it easy to repatriate trillions of offshore dollars, and killing off corporate and job-killing overregulation.
This is actually what the Fed expected would happen along with their own efforts begun in 2009. But whatever. At least Part II is now underway.
Current Fed thinking on interest rate “normalcy”
Unfortunately, the current Fed is, we think, being a little too ambitious in its current attempt to achieve interest rate “normalcy” by jacking those rates 0.25 percent per calendar quarter with no apparent end in sight. In doing so, it’s inducing investors to dump existing bond portfolios as principal erosion is the end result here.
In doing so, however, as those bond prices go down, the effective yields go up. Many are either approaching or even exceeding the dividend yields you can currently get by owning any number of fine American corporate shares. When that happens, the argument for holding riskier assets – i.e.,stocks – weakens and conservative investors start dumping stocks. They trade them for those underpriced bonds.
So at some point, bond prices strengthen while stock prices get hit.
Have we hit “peak stock market” yet?
It seems that with last week’s big interest rate jumps, Wall Street concluded that we’ve hit “peak stock market.” So they’re dumping everything in sight, techs in particular, given the spectacular gains these stocks have experienced thus far in 2018 after an initially rocky January-February period.
You can find evidence for this wild dumping in the VIX, Wall Street’s standard measure of stock market volatility. That number suddenly began to jump last week, and currently stands at around 16 (the last time I looked). Which is pretty volatile.
Wall Street #Resistance movement actually belongs to the bond vigilantes
This seems to be a signal that holding stocks right now is getting pretty risky. That’s another reason why stockholders are bailing. And that’s why over the last few days, the bond vigilante’s Wall Street #Resistance movement is winning.
Let’s check out the latest McClellan Oscillator charts for some near-term answers
The other problem, technically, shows up in my own favorite stock market sentiment measure, the McClellan Oscillator. Numbers above the zero line on this indicator reflect a market that’s in a bullish mood. Likewise, numbers below that zero line indicate that the bears are coming out of hibernation. Extreme positives or negatives on this indicator usually signal that a snapback move in the other direction has become quite likely and is perhaps imminent.
If you look at the regular-way McClellan Oscillator daily chart, based on last Friday’s close, you’ll see that it’s currently in deep-dive negative territory.
Putting this in perspective, the weekly chart, which goes back much further in time, shows us that this current deep-dive, while nasty, still hasn’t approached the market’s Mad Slasher moments it experienced at the outset of 2018. Or even some earlier down moves.
But that said, we’re still at near term extremes. So I’d expect at least a nifty dead-cat bounce some time this week. Today’s probably not the day. That’s because Columbus Day is a weird trading day. Many investors are taking the day off and bonds aren’t trading at all.
Ergo, I expect we get some kind of a down day again today. Maybe even another nasty one. But we should get a bounce somewhere between Tuesday and Thursday.
What do we do if we get a dead cat bounce amidst all the selling?
The bigger question is this one. If we get that bounce, do we lighten up on our positions? Should we fear a worsening of the current Wall Street #Resistance effort? Or, given that a new earnings season avalanche of Q3 2018 numbers gets underway over the next 3 weeks. And given that those numbers, in the main, should be robust.… Do we dump stocks now?
Do we dump them after those numbers come out?
Or do we hold onto our positions in anticipation of that guaranteed (until it’s not) annual Santa Claus Rally. You know. That’s the rally that usually starts after Santa takes his annual victory lap in Macy’s Thanksgiving Day Christmas (not Holiday) Parade.
When it comes to interest rates, bond vigilantes and ornery Bears vs Bulls on Wall Street, your guess is as good as mine.