[Chart courtesy of MarketWatch.com]

1. Moving the markets

The stock market lost steam on Tuesday as a downgrade of several U.S. banks weighed on the financial sector and overshadowed the gains in tech stocks. S&P Global lowered its credit ratings and outlook for some regional and large banks, citing “tough” operating conditions.

The financial sector was the worst performer of the S&P 500, dropping 0.8%. Meanwhile, some retailers also dragged down the market, as Dick’s Sporting Goods and Macy’s plunged by 24% and 13%, respectively, after issuing cautious full-year guidance. The S&P Retail ETF followed suit, falling 1.2%.

On the bright side, tech giants Netflix and Alphabet rose, boosting the Nasdaq Composite. The bond market also remained in focus, as the 10-year Treasury yield eased slightly to 4.33% after hitting a 16-year high of 4.37% on Monday. The rising yield has been a source of concern for equity investors, as it signals higher borrowing costs and inflation expectations.

Some analysts warn that a breakout above the October highs in the 10-year yield could trigger a deeper pullback or even a breakdown in the stock market. Our Trend Tracking Indexes (section 3) are already pointing to a potentially bearish scenario.

Another sign of weakness in the market is the lack of short squeeze attempts, as the basket of the most shorted stocks has plummeted 21% from its July 31st peak. This is bad news for the bulls, but good news for the bears.

One stock that defied gravity was Nvidia, which soared to a record high in the pre-market before reversing course and ending lower. The chipmaker will report its earnings after the close on Wednesday, and investors will be eager to see if its results can justify its lofty valuation.

The currency and commodity markets were relatively quiet, with the dollar flat, gold slightly higher, and bond yields mixed. Rate hike expectations continued to rise, as the Fed is expected to tighten its policy in response to the inflationary pressures.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Fed’s July meeting minutes have caused quite a stir in the market today. Traders are struggling to swallow the bitter pill of rising rates, along with a mixed bag of earnings and economic data.

The 10-year bond yield jumped to its highest level since last October, and rates across the board (including globally) are climbing higher. The Fed’s latest words confirmed that they are still worried about inflation getting out of hand.

Even Walmart couldn’t save the day, despite beating earnings and revenue expectations and raising its full-year guidance. The stock fell by 2%.

It’s been a rough August so far, as the major indexes are on track for another losing week. The S&P 500 has given up -4.8% month to date. It seems that sentiment has changed, and traders have switched from “Buy the dip” to “Sell the rip,” a rare phenomenon in the market.

Of course, this shouldn’t be a surprise, considering that the gains of the first half of 2023 came mostly from the AI related rally, as well as the hope that the Fed would change its mind from hawkish to neutral or even dovish. But that hope may have been a mirage, hence the change in sentiment.

Sure, this could be just a minor setback and eventually turn out to be a buying opportunity on the way to another bull run, but that won’t happen without the Fed’s help.

If nothing else works, the bulls can always try another short squeeze, but that hasn’t worked either. The most shorted stocks have declined 12 of the last 13 days.

The dollar was flat, and gold continued its downward trend, while crude oil reclaimed its $80 level.

Surprisingly, stocks and bonds sank together, which means, if this continues, the S&P 500 has some 800 points to go before it catches up with HYG, as this chart shows.

Ouch! You better have your exit strategy ready, as we are approaching a possible domestic “Sell” signal (section 3).