[Chart courtesy of MarketWatch.com]

1. Moving the markets

Despite the Dow eking out a modest gain, the markets were lacking enthusiasm, which spread to our favorite ETFs as well. Small- and MidCaps were down along with the Nasdaq and gold.

There simply was no place to hide, as the widely held Bond ETF TLT got slammed -1.57% and took out a southerly trending support line, which started in September. Or, put in other words, bond yields surged, thereby not only keeping a lid on equity advances but on gold as well.

The 10-year yield spiked to 1.30% this morning, a level not seen since last February, thereby crushing bond prices, which move in an inverse direction. That in turn took the starch out of equities, with the S&P hugging its trend line but slipping into the red at the close.

Early in the day, things looked bright with all three major indexes hitting record highs. Nevertheless, remember that, if yields continue to levitate, stocks become less attractive. The higher yield scenario would also present a threat to the tech sector, which has profited in this low-rate ecosystem.

Commented well-known strategist Art Hogan:

“The market can digest rising yields, especially when they are going up for the right reason, but not when they go up in a linear fashion.”

And that will be the fly in the ointment, as CNBC added:

Many worry that a rebound in rates could hinder the economic recovery from the pandemic-induced recession as companies and consumers may find it increasingly expensive to borrow. Others wonder if a deluge of fiscal stimulus could spark a rise in prices after a decade of dormant inflation.

Bond yields are the arena to watch, because if this upward trend continues, there will be a fallout effect in equities. The unanswered question is “when?”

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

This session turned out to be very similar to the last two, with the major indexes looking for direction but ending up getting stuck in a sideways pattern with not much won and not much lost.

The S&P 500 and Nasdaq eked out some small gains while the Dow slipped a tad into the red. Even this year’s powerhouse, SmallCaps (IWO), could not muster any strength, but closed in the green by a meager +0.08% and were outperformed by MidCaps (IWP), which sported a +0.72% gain.

It appears that the strong February rally has hit a flat spot and is need of a new driver to pick up the recently lost momentum. Fiscal and monetary stimulus have been priced in the markets, with all eyes now being on a broader economic recovery, along with a broader reopening of businesses and an improved distribution of the vaccine.

Not helping matters today was a worse-than-expected reading of weekly jobless claims. First time filers totaled 793k, which was higher than the expected 760k. Those week numbers go along with Fed head Powell’s assessment yesterday that “in real terms, unemployment remains around 10%, as bad as at the peak of the financial crises.”

He then added:

“Published unemployment rates during COVID have dramatically understated the deterioration in the labor market.”

Also increasing uncertainty was the rise in bond yields during the 30-year auction, which left some traders scratching their head, as yields spiked after their recent easing, demonstrated in this chart by Bloomberg.

The US Dollar continued on its southerly path, but it was not enough, given spiking bond yields, to support gold, which subsequently surrendered -0.88%.

ZH featured another analog comparison to the 1929-1932 period asking this question:

“It’s different this time…but will it end the same?”

Just food for thought.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

Up—down—sideways—up, and down pretty much describes the journey the major indexes took today with the result being an unchanged outcome. However, the Dow squeezed out a tiny gain of +0.20%, but that move was sufficient for the index to eke out another record closing high.

Not even SmallCaps, the winner YTD, were able to gather any momentum and ended lower by -1.07%. Saving the day to a small degree were MidCaps (IWO) with +0.16% and GLD, which again managed a green close by adding another +0.39%.

All eyes were on the outcome of a Fed speech with CNBC describing it like this:

Federal Reserve Chairman Jerome Powell said Wednesday monetary policy needs to stay “patiently accommodative” to support the economy that still faces challenges in the labor market. The employment picture is “a long way” from where it needs to be, the central bank chief told the Economic Club of New York.

Despite the past 2 days having been non-events in terms of performance, keep in mind that so far this has been a strong February with the S&P 500 having gained some 5%, mainly because of continued optimism about the massive Covid-19 stimulus package with more on deck, according to CNBC:

House Democrats unveiled the details of a relief proposal that included $1,400 direct checks with faster phase-outs than previous bills.  President Joe Biden and Treasury Secretary Janet Yellen met with CEOs of JPMorgan, Walmart and Gap Tuesday to discuss additional economic relief.

All the above, if executed as planned, will be exactly the kind of accommodation the markets are looking for and should keep equities moving higher—until the day they won’t. But that moment in time is an unknown date in the future. It also is the main reason why I continue to pounce on the importance of having an exit strategy.  

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