[Chart courtesy of MarketWatch.com]

1. Moving the markets

Last week’s negative market theme continued this morning when the major indexes took another dive with the Dow being down over 500 points at one moment in time. Dip buyers made an appearance, as the indexes attempted to climb out of a deep hole.

Though they did not manage to crawl back to their respective unchanged lines, except for the Nasdaq, it was a valiant effort nonetheless with early losses being cut substantially.  

Bond yields continued to soar with the 10-year breaking briefly through the 1.80% level but settling at 1.77%. We are now witnessing rising yields meeting a slowing economy with consumers, having spent all of their stimulus checks, taking advantage of their credit card availability and going on a record spending spree, as ZH reported.  

The sell-off was broad with more than 70% of the S&P 500 stocks declining. The mid-day rebound had pure growth ETFs like RPG rally off their lows, along with the tech sector in general, and advance by 0.29% for the day.

The US Dollar index pumped and dumped but closed moderately higher. Surprisingly, Gold was not affected by the dollar’s strength, and the precious metal eked out a modest gain and reclaimed its $1,800 level.

Based on Bloomberg’s Financial Conditions Index, there is more downside on deck. However, I think much depends on how serious the Fed will be to fight inflation with much higher rates and less stimulus. After all, they are the elephant in the room.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Another up and down day supported the meme that bulls and bears are engaged in a tug-of-war with the latter so far coming out on top. However, today, the forces were more evenly matched, as the major indexes surrendered only a fraction with the Dow faring the worst.

The tech sector was in scramble mode with some of their darlings continuing to slide, which made traders realize that tech will not always be the winner every trading day in 2022, thereby causing the overweight allocations to be adjusted.

The main irritant behind today’s scramble remains the hard to accept fact that the Fed will remove its economic stimulus more quickly than hoped for, which has contributed to the wild swings of the recent days. Odds are now 86% that we will see 3.5 rate-hikes by the end of 2022.

As a result, bond yields continued their climb higher with the 10-year touching the 1.75% level before pulling back to the 1.72% area. For reference, the 10-year ended 2021 at 1.51%. The main beneficiary of this ramp has been the banking industry with the financial ETF XLF adding +1.5% for the session.

The US Dollar chopped around as well and ended slightly in the green, but gold was the dud of the day after getting hammered and losing its $1,800 level again. The precious metal gave back -2.04%.

Can tomorrow’s jobs report give an assist to the bulls?

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Though the Dow staged a solid rally early in the session, the S&P 500 was barely hanging on to its unchanged line, but the Nasdaq never saw any green numbers. All of this changed mid-day with the major indexes simply losing steam and dumping into the close led by the Nasdaq with a loss of -3.34%.

At the center of this turnaround were the minutes of the Fed’s most recent meeting, which showed members discussing a reduction of their balance sheet right after their intended rate hikes later in 2022.

MarketWatch added some color:

The Fed is tapering its bond purchases now and has already indicated to the market that it will raise rates soon after it finishes that taper in March. But the market is awaiting indications from the Fed on what it will do with its nearly $9 trillion balance sheet once it’s done increasing it. The minutes show officials to be considering shrinking the balance sheet along with raising rates as another way to remove policy accommodation.

Ouch! That was more of a hawkish view than traders had expected and down we went. Remember, the increase of the Fed’s balance sheet is and has been directly correlated with market advances, so a reversal of their policy might have an adverse effect due to a reduction in liquidity.

Adding insult to injury, then this:

“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes stated.

In other words, higher rates and bond yields will be on deck much sooner than expected and may exact their pound of flesh from the markets. As ZeroHedge commented, as of this moment, the entire Santa Claus rally has been erased.

SmallCaps (-4.18%) and Growth (RPG, -3.81%) were hit the hardest, while value (RPV) held up the best by giving back only a modest -0.55%

Bond yields rose with the 10-year touching the 1.7% level but closing just a tad below. The US Dollar index rallied and, even though gold held steady above its $1,800 level, it gave back a scant -0.26%.

The question in my mind is this one: How much will the markets have to drop before the Fed reverses policy again and comes to its rescue?