Bond Yields Surge, AI Stocks Rally, And Market Goes Nowhere Fast

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The S&P 500 barely budged Monday as the 10-year Treasury yield soared, and the market started the last week of September with a whimper. But hey, at least the index closed in the green.

The 10-year Treasury yield reached 4.5%, hitting levels not seen since 2007 when it peaked at 4.57%. Remember 2007? Good times.

Meanwhile, Amazon shares climbed more than 1% after the online retail giant said Monday it will invest up to $4 billion in artificial intelligence firm Anthropic. Shares of Nvidia rose 1.5%. AI is hot, hot, hot, despite high interest rates. Go figure…

We are wrapping up a notoriously weak month for markets, as the Federal Reserve signaled higher interest rates for longer, sending bond yields higher. The benchmark 10-year Treasury yield has jumped more than 30 basis points this month to over 4.51%.

The market also dealt with a rally in crude oil and a winning streak in the dollar during the seasonally weak trading month. The S&P 500 has dropped more than 4% in September, on track for its second straight losing month and its worst month since December. The tech-heavy Nasdaq Composite is down 6% in September, as growth stocks took the brunt of the sell-off, also headed for its biggest monthly loss since December.

Traders are also closely watching progress on a budget resolution in Washington. Lawmakers over the weekend showed little signs of movement on a deal that would keep the U.S. government funded for the rest of the fiscal year.

The other risk that can affect the economy is the student loan-payment resumption, which in combination with the government shutdown, could trigger notable declines in GDP.

And, to add insult to injury, inflation threats are re-asserting themselves (via commodities) and hurting sentiment via soaring gasoline prices.

The US Dollar broke out of its trading range to its highest point since December 2022. That move was helped by surging bond yields, with the 10-year exploding higher and reaching October 2007 levels.

Of course, the dollar’s gains were gold’s losses, as the precious metal tumbled to last week’s lows. Oil prices lagged and ended the day unchanged.

With real rates reaching new cycle highs, valuations on stocks are starting to close the alligator jaw, as this chart shows.

Will it snap shut all the way? Or will it just give us a friendly nibble?

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ETFs On The Cutline – Updated Through 09/22/2023

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 (156 vs. 88 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 September 22, 2023

Ulli ETF Tracker Contact

ETF Tracker StatSheet          

You can view the latest version here.

MARKETS HIT WALL OF WORRY, FED TALKS TOUGH, GOVERNMENT SHUTDOWN LOOMS

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The markets tried to shake off their blues, but hit a wall of red. The indexes turned around and slid below unchanged lines. They couldn’t make a comeback and ended up with the fourth loss in a row.

This triggered our domestic “Sell” signal, as I warned you yesterday. You can find more details in section 3 below. The S&P 500 had a terrible week, losing about 3% and posting its worst performance since March. It was also the third week in the negative zone.

Even the most hated stocks couldn’t help the recovery. They suffered their second month of declines (and seventh week out of eight). This was the biggest weekly drop for the short basket since March.

Bond yields soared this week after the Fed hinted at one more rate hike for 2023. The 10-year Treasury yield jumped to 4.498%, the highest level since 2007. The 2-year rate reached 5.2%, the highest level since 2006.

Traders also worried about a possible government shutdown, which could hurt consumer confidence and slow down the economy. House Republicans decided to take a break on Thursday. Everyone knows that the government will shut down sooner or later, and the markets are just waiting for it to happen, and then guessing how long it will last.

Despite the Fed’s repeated messages that they want to keep rates “higher for longer” and that a ‘pause’ is not the start of a rate-cut cycle, the markets ignored them… until this week. As this chart from Google Trends shows, people are finally listening to the Fed.

ZeroHedge summed it up like this:

• *FED’S COLLINS: FURTHER FED HIKES ‘CERTAINLY NOT OFF THE TABLE’, EXPECT RATES MAY HAVE TO STAY HIGHER FOR LONGER

• *FED’s BOWMAN: MORE RATE HIKES LIKELY NEEDED TO GET INFLATION TO 2%, NEED TO REPEAT MONETARY POLICY ISN’T ON PRESET COURSE

• *FED’S DALY: I DON’T GET TO A POINT WHERE I’M READY TO DECLARE VICTORY, UNLIKELY INFLATION WILL REACH 2% GOAL IN 2024

So, no surprise that the market has changed its mind about the Fed’s rate path. The odds of a rate hike in 2023 are lower and the odds of a rate cut in 2024 are much lower.

The dollar had a strong week, rising for the eighth time in nine weeks. Crude oil had a lot of drama but ended flat. Gold was also unchanged.

Looking at the latest update comparing the AI Boom with Covid/Crypto bust, we can see that we are still on track.

Will history repeat itself?

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 09/21/2023

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, September 21, 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 -1.86% and has moved into “Sell” mode effectively tomorrow, unless the markets turn and surprise us with a solid rebound.

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Stocks Slammed By Fed’s Hawkish Stance: Domestic “Sell” Signal Generated

Ulli Uncategorized Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The market had a terrible day on Thursday. Stocks fell like rocks, as bond yields soared to levels not seen in years. The Fed is to blame, as it plans to keep raising interest rates and keep them high for a long time. The Fed thinks the economy is too hot and inflation is too high, so it wants to cool things down with higher rates. But the market thinks the Fed is making a mistake and risking a recession.

The Fed’s decision came after a report showed that the job market is still strong, with fewer people filing for unemployment benefits than expected. This means that more people have jobs and incomes, which is good for the economy. But it also means that the Fed has less reason to cut rates, which is bad for the market.

The Fed’s chair, Jerome Powell, tried to calm the market by saying that the economy could still land softly, without crashing hard. But he also said that this was not his main expectation. He sounded like he was not very confident about his own plan.

The market did not like what Powell said, or what he did not say. The market wanted him to say that he would cut rates soon, or at least stop raising them. But he did not say that. He said he would keep raising them and keep them high for longer.

The market reacted by selling stocks and buying bonds. This pushed up bond yields, which are the interest rates that bond investors get. Higher bond yields mean lower bond prices, and lower stock prices too. Higher bond yields also mean higher borrowing costs for businesses and consumers, which can hurt the economy.

The market was already worried about other things, like the housing market slowing down, the manufacturing sector shrinking, and the government shutting down. These things can also hurt the economy and make the market nervous.

The market was so nervous that it broke some important support levels, which are the prices that usually stop the market from falling further. When these levels are broken, the market can fall even more.

Equities fell so much that our Domestic Trend Index turned more negative and gave us a “Sell” signal for domestic equity funds. This means that we should sell these funds tomorrow unless the market bounces back strongly. See section 3 below for more details.

I am doing this to protect our portfolios from losing more value if the market keeps falling. I think it is better to be cautious than reckless in these uncertain times.

Stay tuned.

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Fed Confuses Everyone: Markets Lose It

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The Fed meeting was the main event of the day, as everyone waited with bated breath to see what the central bank would do with interest rates. Would they hike, cut, or hold steady? Would they signal a dovish or hawkish stance? Would they make any jokes or puns to lighten the mood? Spoiler alert: they did none of the above.

Instead, the Fed delivered a mixed bag of messages that left the markets confused and disappointed. They kept rates unchanged, as expected, but hinted at one more hike before the year ends.

They also said they would start cutting rates next year, but not as much as they previously indicated. They raised their growth and inflation forecasts but lowered their unemployment projections. They said they would be careful and flexible, but also vigilant and proactive.

In other words, the Fed tried to have their cake and eat it too. But the markets were not amused. They wanted a clear and consistent direction from the Fed, not a wishy-washy and contradictory one. They wanted a Fed that was either done or ready to cut, not one that was still hiking while preparing to cut. They wanted a Fed that was either fighting inflation or supporting growth, not one that was doing both at the same time.

So, what did the markets do? They threw a tantrum. The major indexes plunged into the close, with the S&P barely clinging to its 4,400 level. Bond yields spiked, with the 2-year hitting a new high since 2006. The most shorted stocks tanked, as investors lost their appetite for risk. The dollar went on a roller coaster ride, which reversed gold’s early gains.

The only winners of the day were the oil prices, which eased slightly after reaching $92 on Tuesday. But that was hardly a consolation prize for the markets, which feared that higher energy prices would fuel inflation and slow down the economy.

The bottom line is that uncertainty reigned today, as the Fed failed to deliver a clear and coherent message to the markets.

The question now is: Will the Fed change its tune in the next meeting, or will it continue to confuse and disappoint?

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