Oil Deal And Bond Rally Lift Stocks Despite Inflation Spike

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Stocks went up on Wednesday as investors shrugged off the latest inflation scare and celebrated a big deal in the oil industry (Exxon swallowed Pioneer Natural Resources).

Treasury yields kept falling from the 16-year peaks they hit last week, which gave stocks a boost after a midday slump. Another factor that helped stocks bounce back was the easing of financial conditions in the past few days, as the Middle East turmoil sent investors running for the safety of bonds.

I wonder if some hawkish Fed officials will show up soon and talk rates back up again. The producer price index (PPI) climbed 0.5% in September, beating the forecast of 0.3%. This pushed the headline number up by 2.2% year-over-year. That’s the highest annual increase since April 2023 and the third month in a row, as food prices soared to levels not seen since November 2022.

The 10-year Treasury yield dropped even after the hotter-than-expected inflation data, reaching its lowest point since Sept. 29. The 10-year shed more than 9 basis points to 4.569%.

If bond yields keep going down despite rising inflation, I think that will be the main reason for a decent recovery in the stock market. But it all depends on how bad the inflation numbers get.

Tomorrow’s CPI may give us a better idea of where we’re headed. Yesterday’s short squeeze was nowhere to be seen today, the dollar was steady, crude oil cooled off, and gold kept climbing to hit two-week highs.

Minutes from the Fed’s latest meeting due later today will reveal more about the central bank’s plans for raising interest rates after it decided to skip a hike last month.

And tomorrow, it will be all about the CPI which, if worse than expected, could wake bond yields from their dovish nap.  

Will inflation keep spooking the markets or will bond yields come to the rescue?

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How Long Can Stocks Defy Gravity Amid Geopolitical And Economic Risks?

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

U.S. stocks went up on Tuesday, thanks to lower Treasury yields and a short squeeze.

Wall Street was busy assessing the geopolitical risks of the Israel-Hamas war, which has been going on for longer than some Netflix shows.

The 10-year Treasury yield ended down 15 basis points to 4.65%, as investors flocked to the safe haven of bonds amid the conflict. The bond market was closed on Monday for Columbus Day, so this was its first chance to react to the war.

The drop in yields gave stocks a boost, as Wall Street was worried about the recent spike in interest rates. Investors may also be ignoring the geopolitical risks caused by the conflict, helped by Friday’s allegedly strong September jobs report and optimism ahead of a bunch of earnings this week.

However, there was a buzzkill in the form of Paul Tudor Jones, the legendary hedge fund manager who said that he doesn’t like stocks right now. He prefers bitcoin and gold, as he thinks the US Treasury can’t protect investors like it used to.

I agree with him, and our Trend Tracking Indexes (TTIs) confirm the uncertainty and instability we are in. The bear market rally of the last few days has only helped investors recover some of their losses, which they suffered after our Sell signal on 9/22/23.

As I write this, I think the market may go up another 1-1.25% before hitting resistance and reversing. The inflation reports tomorrow, and Thursday (PPI and CPI), will likely affect market direction.

The dollar continued to slide, oil prices were slightly lower, and gold was flat but holding on to its gains.

Looking at this chart, it seems that financial conditions are too tight for stocks to be this high. Or is this just a preview of what’s coming soon?

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Stocks Defy Gravity As Bond Market Snoozes And Fed Sings

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Monday was a day of surprises for the stock market, as it bounced back from a morning slump despite the escalating violence in the Middle East. The bond market took a holiday, leaving investors in the dark about the impact of the Israel-Hamas conflict on interest rates.

The major indexes started the day in the red, with the Dow dropping 154 points at its lowest point, and the S&P 500 and the Nasdaq losing 0.6% and 1.15%, respectively. But by the end of the day, they had recovered their losses and even posted some decent gains.

The market was rattled by the news that Hamas had launched a ground invasion of Israel on Saturday, catching the Israeli army off guard. The conflict could have implications for the energy market, as some analysts predicted a spike in oil prices, but others downplayed its significance. The conflict also added to the market’s anxiety about inflation and rising interest rates, which have been plaguing investors for months.

But what turned the tide for the market was a chorus of Fed officials who hinted that the Fed might be done with raising rates for now. They echoed what SF Fed President Mary Daly said on Friday, that the high 10-year Treasury yields have already done the Fed’s work of tightening financial conditions. Hmm…

If that’s true, and that’s a big if, then we might see a reversal of the recent trend in the market. Rate cuts could be back on the table, and that could boost everything from gold to stocks to crypto. But how likely is that scenario? And how long will it last?

That’s the question that traders will have to answer in the coming days. And depending on their answer, we might find ourselves back in domestic equities again—or not.

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ETFs On The Cutline – Updated Through 10/06/2023

Ulli ETFs on the Cutline Contact

Do you want to know which ETFs are hot and which ones are not? Then you need my High-Volume ETF Cutline report. It tells you how close or far each of the 311 ETFs I follow is from its long-term trend line (39-week SMA). These are the ETFs that trade more than $5 million a day, so they are not some obscure funds that nobody cares about.

The report is split into two parts: The winners that are above their trend line (%M/A), and the losers that are below it. The yellow line is the line of shame that separates them. You can see how many ETFs are in each group and how they have changed since the last report (70 vs. 63 current).

Take a peek:

The HV ETF Master Cutline Report

If you are confused by some of the terms we use, don’t panic. I have a helpful Glossary of Terms for you.

If you want to learn more about the Cutline method and how it can make you rich (or at least less poor), read my original post here.

ETF Tracker Newsletter For October 6, 2023

Ulli ETF Tracker Contact

ETF Tracker StatSheet          

You can view the latest version here.

TRADERS IGNORE BOND YIELDS AND JOBS REPORT, LIFT STOCKS FROM LOWS

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The markets had a crazy day, as traders shrugged off soaring bond yields and the stellar jobs report and pushed the major indexes from the red to the green. Maybe they were just buying the dip, or maybe they were feeling optimistic, but they ignored the bad news that should have spooked them.

The U.S. economy added a jaw-dropping 336,000 jobs in September, the most since January. Economists expected only 170,000. But wages grew less than expected last month, so maybe it wasn’t all roses.

What sparked the turnaround?

Well, some traders might have smelled a rat in the jobs number. Remember how most of this year’s economic data was revised down a month later, when no one was paying attention? Maybe they thought that September was too good to be true, especially when many companies were closed due to labor strikes (i.e., people not working).

How did the US add 336K jobs, double the consensus, in such a month? It sounds fishy, doesn’t it?

The 10-year Treasury yield jumped more than 12 basis points to trade near a 16-year high, but it retreated at the end and closed at 4.79%. Friday’s jobs report made investors worry that the Fed will have to keep rates high for longer to fight inflation.

But others doubted the report and cut their losses in bonds and stocks, as the S&P 500 barely closed in the green for the week, thanks to a huge buy order and a ‘massive’ short squeeze. The 336K number is huge and means the Fed could easily hike another 25bp and stay high for a long time.

Rates will keep rising and that will hurt stocks, especially with tighter financial conditions. Those traders who bet that the Fed “has to” lower rates, and bought bonds too soon, saw the 20-year bond fund TLT lose another 1.2% today. TLT has dropped about 15% YTD, after a whopping 33% plunge in 2022. So much for bonds being safe.

Bond yields spiked, the dollar rose for the week, gold rebounded but ended lower for the week, as crude oil fell but stayed above $82. As ZeroHedge pointed out, this year, S&P 500 companies are facing the biggest rise in borrowing costs since 2006.

Lending money to the US government at 5%-plus is tempting for investors who don’t like risk.

After all, why gamble on corporate performance when you can get a risk-free return in T-Bills?

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 10/05/2023

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ETF Data updated through Thursday, October 5, 2023

How to use this StatSheet:

  1. Out of the 1,800+ ETFs out there, I only pick the ones that trade over $5 million per day (HV ETFs), so you don’t get stuck with a lemon that nobody wants to buy or sell.
  1. Trend Tracking Indexes (TTIs)

These are the main indicators that tell you when to buy or sell Domestic and International ETFs (section 1 and 2). They do that by comparing their position to their long-term M/A (Moving Average). If they cross above, and stay there, it’s a green light to buy. If they fall below, and keep going, it’s a red light to sell. And to make sure you don’t lose your shirt if things go south, I also use a 12% trailing stop loss on all positions in these categories.

  1. All other investment areas don’t have a TTI and should be traded based on the position of each ETF relative to its own trend line (%M/A). That’s why I call them “Selective Buy.” In other words, if an ETF goes above its own trend line, you can buy it. But don’t forget to use a trailing sell stop of 12%, or less if you’re feeling nervous.

If some of these words sound like Greek to you, please check out the Glossary of Terms and new subscriber information in section 9.

  1. DOMESTIC EQUITY ETFs: SELL— since 09/22/2023

Click on chart to enlarge

This is our main compass, the Domestic Trend Tracking Index (TTI-green line in the above chart). It has now broken below its long-term trend line (red) by -4.59% and has moved into “Sell” mode effectively 9/22/2023.

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