1. Moving the markets

We have now witnessed a continued roller coaster with no clear direction but huge daily swings in equities. Over the past 4 trading days, we noted this pattern: down, up, down, up with today’s rally bringing the S&P 500 just about back to last Wednesday’s price. In other words, not much was gained or lost, but with “breadth” being indicative of more downside to come.  

Despite its recent weakness, the Nasdaq finally stormed back outperforming the other two major indexes, at least for this session. In the recent past, we saw a tale of two markets with stocks tied to the economic recovery battling Big Tech, with the latter struggling during the past month, but today both gained.

After yesterday’s market drubbing, an unexpected assist surfaced this morning, as news spread that Senator Manchin’s stern view of the Biden infrastructure package may be showing signs of cracking with him now not ruling out a $1.9-2.2 trillion social spending plan. That is much higher than his earlier number of around $1.5 trillion.

That was music to the ears of traders on Wall Street and off we went. While the markets came off their highs in the end, it was nevertheless a solid recovery from yesterday’s debacle.

Despite the warm fuzzies that today’s rebound evoked, debt ceiling doubts continue to spread, as this chart shows. Of course, we’ve seen that tug-of-war for decades, followed by last-minute compromises, but it still leaves me wondering “will it be different this time?”

The US Dollar index rallied and bond yields surged, thereby leaving gold in the dust with the precious metal dipping 0.38%.

1. Moving the markets

After Friday’s levitation to start the month of October on a positive note, much of that enthusiasm waned, as the mood soured thereby pushing the major indexes into the red. The Dow fared the best and the Nasdaq the worst, because of higher interest rates exacting another pound of flesh from this sector.

Unless bond yields do an about face and head south again, the Nasdaq won’t have much of a chance to recover. Right now, one of our tech holdings is nibbling at its trailing sell stop and will be liquidated upon breaking through this predetermined level.

Added Jim Paulsen, a chief investment strategist:

The financial markets are adjusting leadership to reflect another Covid-induced reopening cycle. That is, commodities are rising, bond yields are rising, cyclical sectors and small cap stocks are outpacing, and technology and growth stocks in general are underperforming.

Of course, the entire stock market is operating at extremely lofty levels, so it’s as no surprise that corrections will come into play. The question in my mind is whether these are just temporary pullbacks, or is something more sinister brewing in the background that will pull equities much lower and into bear market territory?

I think the odds currently are favoring that scenario when considering the barrage of unknowns that is bombarding the markets daily. For example, the ever-increasing inflation risks, Federal Reserve tapering, rising bond yields, supply chain disruptions, the debt ceiling anxiety, the Evergrande bond default and higher taxes all add poison to this cocktail called the stock market.

Fortunately, we don’t have to guess which way things will turn. Because we will let our trailing sell stops and Trend Tracking Indexes (TTIs) be our guide to advise us when it’s time to reduce our risk by moving to the safety of the sidelines. 

Is this chart indicating that we are getting close?

You can read this week’s posting schedule here.

1. Moving the markets

The bulls and bears were engaged in a tug-of-war session with the former seemingly storming ahead only to be pulled back down to reality by the latter. Gains came and went and, when the closing bell rang, only the Dow & S&P 500 were able to barely stay above their respective unchanged lines.

The culprit was the same as yesterday, namely bond yields, which rode the roller coaster again with the 10-year first dropping to 1.5% and then swinging higher in afternoon trading into the 1.54% area.  

The Nasdaq followed this trend by being higher early on, as rates eased, but then lost altitude as yields again marched higher. As a result, the pressure was on “growth” with “value” and Small Caps benefiting.

Giving an assist to bearish sentiment was the ongoing Washington debacle with debt ceiling doubts sending questionable messages to the international community about the ability of the USA to fulfill its obligations.

Choppy and sloppy best describes today’s equity moves, as dip buyers where present during the session but absent late in the day, as equities came off their highs. It now looks like the S&P 500 is on track to score its first monthly decline since January.

Zero Hedge called it this way:

While rising bond yields, Fed tapering, the delta variant and inflation help explain that, all of those will slow profit growth after rising earnings estimates and big beats helped fuel 2021’s stock rally until now with an always-optimistic eye for the ‘recovery’ and ‘return to normal’ that now seems ever further away.

The US Dollar index, in the face of higher bond yields, continued its northerly path by registering its biggest 2-day jump since June, and it seems to be closing this September on a high note, just as it did in 2020.

Again, higher bond yields and a rallying dollar combined to take the starch out of Gold which, despite a mid-day rally, was not able to hold on and retreated -0.72%.

So far, the analog to 1987 is right on track, as Bloomberg’s chart shows.