Bond Yields Spike To New Highs, Stocks Plunge To New Lows

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The stock market plunged today as bond yields soared to new highs. The trigger was the August job openings report, which showed a record-breaking 9.61 million vacancies in the U.S. economy. That’s a whopping 690,000 more than the previous month, and the largest jump since July 2020.

The 10-year Treasury yield settled at 4.80%, slightly below its peak of 4.81% in the morning, which was the highest level since 2007. Investors are finally waking up to the reality that the Fed is and has been serious about tightening monetary policy for a long time. I have been warning about this all year, while the Wall Street pundits were in denial.

High yields are bad news for stocks, especially as financial conditions get tighter and tighter. CNBC’s Rick Santelli added fuel to the fire by predicting that the 10-year yield could reach 13% or 14% in the next seven years. He blamed the runaway government spending and the looming $2 trillion deficit for triggering inflation and bond vigilantes.

He has a point, but his doom-and-gloom scenario did not go down well with the equity bulls, who sold off their shares in panic. The only silver lining is that we, as Trend Followers, have been out of this mess since our domestic TTI signaled a “Sell” on 9/22/2023.

Things could get even uglier if the S&P 500 breaks below its 200-day moving average, which is not far away. Banks (KRE) are also suffering, as higher yields expose their balance sheet problems.

Interestingly, the one thing that used to prop up the market most of the year – short squeezes – is no longer working. The most shorted stocks are now in negative territory for the year.

Meanwhile, bond yields surged, the dollar was flat, gold was down a tad, and oil was up.

QTR’s Fringe had a nice take on the current uncertainty:

There is no way that an “everything bubble” inflated by years of zero interest rates and trillions of dollars of global “quantitative easing” can survive when faced with 5%+ rates and $95 billion/month of U.S. “quantitative tightening” plus less money from other central banks.

Contrary to what equity bulls think, bubbles don’t pop softly, and when they do, it takes a long time for lower inflation and lower rates to help stock prices. When the 2000 bubble popped and the Nasdaq crashed by 83% and the S&P 500 by 50%, inflation rates were only 3.4% in 2000, 2.8% in 2001 and 1.6% in 2002, and the Fed was cutting rates almost non-stop.

Will this time be different?

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Market Shrugs Off Shutdown Drama And Braces For More Rate Hikes

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The stock market was in a bad mood on Monday, even though the politicians managed to avoid a government shutdown at the last minute.

The market ended the day flat, like a pancake. The small-cap stocks were especially unhappy, as the Russell 2000 index dropped 1.7% and turned red for the year. This was the first time the index lost money in 2023, showing that small is not always beautiful.

The Senate passed a bill to keep the government running until mid-November, just before the clock struck midnight on Saturday. President Biden signed it into law, and then probably went to bed. The lawmakers now have more time to figure out how to spend our money.

The market usually doesn’t care much about government shutdowns because they don’t affect the S&P 500 much. The average change for the index during a shutdown is zero, which is also the number of people who like shutdowns.

The Fed’s top watchdog, Michael Barr, said on Monday that interest rates will stay high for a long time. He said we should focus more on how long they will be high, rather than if they will go up one more time this year. The market got the message and shifted its expectations from dovish to hawkish.

The Manufacturing PMI report showed that inflation was heating up faster than a microwave, and the Fed speakers confirmed that they were not going to cool it down anytime soon. Fed Governor Michelle Bowman said that they may need to raise rates several times to bring inflation back to 2%. She said she still expects more rate hikes in the future, which is like saying she expects more pain in the future.

That tough talk boosted the dollar, which hurt oil and gold prices. Oil slipped below $90, while gold hit new lows. Gold bugs must be feeling very lonely right now.

Bond yields jumped with the 10-year Treasury yield rising more than 10 basis points to 4.68% on Monday. Investors dumped Treasurys like hot potatoes after they heard that the government was not going to shut down. Apparently, they prefer risk over safety these days.

The most hated stocks got crushed, as the short squeeze from last Thursday ran out of steam and reversed. The shorts must be feeling very smug right now. Financial conditions are getting tighter, which means that stocks may have more downside ahead, according to ZeroHedge.

But who knows, maybe a big rally will come out of nowhere and change everything. Could that happen? Or are we doomed? You never know what will happen next in this crazy market.

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ETFs On The Cutline – Updated Through 09/29/2023

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 (88 vs. 70 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 29, 2023

Ulli ETF Tracker Contact

ETF Tracker StatSheet          

You can view the latest version here.

NO TREATS FOR THE BULLS: THE MARKETS ENDED SEPTEMBER AND Q3 IN THE RED

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

The markets started Friday on a high note, thanks to the latest inflation data that made investors feel optimistic. But the good mood didn’t last long, as the major indexes dumped their gains and ended the month and quarter in the red. Talk about a mood swing!

Friday’s personal consumption expenditures price index reading, which is the Fed’s favorite way to measure inflation, gave the market a boost. The core PCE, which excludes the prices of things that actually matter, like food and energy, rose 0.1% in August and 3.9% year over year. But after three months of deflation, the prices of goods came back with a bang and jumped in August (the highest increase since June 2022). Looks like someone had a growth spurt!

The market suffered big losses for the trading month and quarter, both of which ended today. The S&P 500 finished the month down 5% and the quarter lower by 3.6%. The Nasdaq Composite was off 5% in September, and down 3.3% for the quarter. Both had their worst quarters this year and since Q3 2022. Ouch!

Stocks have fallen too much and too fast during this seasonally volatile time of the year, driven by a long list of worries. The market only a few months ago was worry free, believing that the Fed could land the plane smoothly. But now the market is freaking out, as traders question the economic outlook. And to make things worse, traders also feared a government shutdown this weekend, as House GOP leaders failed to pass a short-term spending bill today. Way to go, guys!

The past three months was the first quarter of tightening financial conditions since 2022, with September being the biggest monthly squeeze in a year. And why is that? It’s simple: the low came right after the “alleged” last Fed hike (July 26). I find that hilarious.

While Q3 was bad, September was even worse, with Energy being the only sector that stayed green. Every other sector got hammered. The bond market was a massacre, not just in the US but globally as well.

ZeroHedge summed it up like this:

  • 5y US yield highest since 2007
  • 10y US yield highest since 2007
  • 30y US yield highest since 2010
  • 10y German yield highest since 2011
  • Japan 10y highest since 2013
  • Japan 20y highest since 2014
  • Japan 30y highest since 2013

The dollar rallied for the second straight month in September to its highest close since Nov 2022. Q3 was the dollar’s first positive quarter since 2022.

Finally, the disconnect between real yields and the S&P 500’s P/E valuation came into the month at a noted extreme. And while the index dropped ~5%, real yields rose too. This chart explains it.

Will the bulls be able to turn things around as we enter red October? Or will they be spooked by more tricks than treats?

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 09/28/2023

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, September 28, 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 -2.30% and has moved into “Sell” mode effectively 9/22/2023.

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Stocks Rebound On Short Squeeze, But Will It Last?

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the markets

Stocks finally got off the floor on Thursday and clung to their gains until the end, as investors watched the wild swings in the bond market with bated breath.

After weeks of getting hammered, the market needed a bounce. A massive short squeeze helped the bulls but don’t get too excited. This rally might fizzle out by next week.

The 10-year Treasury yield soared to a new 15-year high in the morning, as the latest data showed fewer people filing for unemployment benefits than expected. The stock market has been following the bond market like a lost puppy lately.

Any spike in rates makes investors nervous about a recession and sends stocks tumbling. The S&P 500 hit its lowest level since June this week as the 10-year yield reached its highest since 2007.

Friday is the last day of a rough month and quarter for the market. The S&P 500 is set to end the month down 5% and the quarter down 4%. The Nasdaq is doing even worse, losing more than 6% this month and more than 5% this quarter.

Traders will be looking at the latest inflation report on Friday. The PCE index is the Fed’s favorite measure of inflation and, thanks to rising oil prices, it might back up their stance of keeping rates high for longer.

On the economic front, we saw that pending home sales dropped more than expected in August (-7.1% vs. -1%), showing how hard it is for buyers to afford a home with higher interest rates. Jobless claims fell to their lowest level in a year.

Bond yields spiked in the morning but calmed down in the afternoon, giving the rally some breathing room. As yields fell, the dollar lost its mojo and pulled back from its highs. Gold, which usually likes a weaker dollar, dropped, and gave up its $1,900 mark. Oil prices hit $95 overnight, but then lost steam and fell below $92.

Will tomorrow’s inflation report spoil the party?

Stay tuned.

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