[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The stock market had a good day on Wednesday, as the S&P 500 got close to the 5,000 mark for the first time ever. Investors were happy with the latest earnings reports, which mostly beat the low expectations.

Big tech and AI companies did especially well, but they also hogged most of the spotlight. The problem is the economy is growing too fast for the central banks to handle. They are trying to keep inflation under control, but they don’t know when and how much to cut interest rates.

Fed chair Powell has been putting the brakes on the rate-cut hopes, making the market more volatile.

Meanwhile, the regional banks are in trouble. New York Community Bancorp tanked 11% after getting a junk rating from Moody’s. The bank lost money and cut its dividend in the fourth quarter, thanks to the falling values of commercial real estate. It was not the only one, and some fear it could trigger a new banking crisis.

The Fed speakers did not help much, as they gave mixed signals about the rate outlook. Some said they would wait and see, some said they would cut rates two or three times this year, some said they were not done with inflation yet, and some said they might raise rates later. It was a confusing chorus of voices, and the market did not buy it.

The Nasdaq did not care, though, as it led the rally with the Mag7 stocks hitting new highs. NVDA reclaimed its $700 throne, while the others followed suit.

The rally happened despite rising bond yields, which usually hurt stocks. The dollar was flat, gold was choppy, and oil was up.

ZeroHedge thinks this is all a repeat of the 1999-2001 bubble, and that the expiration of the BTFP (Bank Term Funding Program) will end it all at the top.

But maybe they are wrong, and this time is different.

[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The Dow Jones Industrial Average rose on Tuesday, but it was hardly a cause for celebration. Wall Street was busy digesting the latest earnings reports and the Fed’s reluctance to cut rates anytime soon. The S&P 500 and Nasdaq barely scraped by with positive returns, thanks to some last-minute shopping by bargain hunters.

Traders were left scratching their heads after Fed Chair Powell poured cold water on their hopes for a March rate cut. He also warned that some banks may go bust due to the shift in downtown real estate demand. Powell’s comments sent bond yields lower, but it still dampened the mood of the bulls.

The market rally also lacked breadth, as only a few stocks carried the weight of the gains. This raised doubts about the sustainability of the uptrend, especially as volatility looms on the horizon. The last two days have been a taste of what’s to come in the next few weeks.

ZeroHedge summed up the mixed messages from the Fed speakers as follows:

The Good: KASHKARI: Inflation is on target; we don’t care about politics or elections.

The Bad: MESTER: We may cut rates later this year; no need to hurry or ease the balance sheet.

The Ugly: YELLEN: The dollar is losing its appeal; some countries are looking for alternatives; but don’t worry, it’s not a big deal.

The regional banks were not impressed by the Fed’s rhetoric. The KRE index plunged 12% in the last 5 days, signaling trouble in the sector. The NY Community bank was the worst performer, dropping like a rock. Is this the first domino to fall, or just a blip on the radar? Gold bounced back as bond yields retreated, while the Mag7 stocks slid lower.

Powell’s Sunday remarks also included this gem:

“Some banks will have to close or merge because of this. They’ll be smaller banks, mostly. These are losses. It’s a change in how people use downtown real estate. And the result will be losses for the owners and the lenders, but it should be manageable.”

Sounds like he’s preparing us for the worst.

Maybe it’s time to avoid banks altogether?

[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The market had a rough start today as Fed chair Powell poured cold water on the hopes of rate cut seekers. He repeated his hawkish stance in a “60 Minutes” interview last night, saying he needed more proof that inflation was under control before he would consider lowering rates.

This sent bond yields soaring and stock prices tumbling. But the major indexes showed some resilience and bounced back from the lows, thanks to a short squeeze and some bargain hunting. Still, it was not enough to end the day in the green.

The market also digested some solid economic data that showed the service sector was doing well in January. The ISM nonmanufacturing index came in at 53.4, beating the Dow Jones estimate of 52. This was good news for the economy, but bad news for those who wanted a rate cut.

Meanwhile, investors were hoarding cash in money market funds, signaling a mixed sentiment about stocks. On the one hand, high cash levels could mean that investors were skeptical about the record highs on the SPX. On the other hand, high cash levels could also mean that investors had plenty of ammo to buy the dips.

Regional banks (KRE) took a hit again but trimmed their losses. The dollar got a boost from higher yields, but gold suffered. Since mid-January, stocks (green) and bonds (red) have diverged, as this chart shows. But we know they will eventually converge again.

The question is: who will blink first? Will bond yields come down to earth or will stocks crash and burn?