[Chart courtesy of MarketWatch.com]

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.

[Chart courtesy of MarketWatch.com]

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.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

There was no question that spiking bond yields were the destroyer of equity prices, with the major indexes tanking in unison right after the opening bell. A couple of rebound attempts were rebuffed, and the downward trend continued with the Nasdaq faring the worst with a loss of 2.83%.

Bond yields shot up with the 10-year touching 1.558%, its highest level since June, before retreating, while the 30-year catapulted above 2%. Amazingly, we saw the 10-year as low as 1.29% last week, and it had sunk as low as 1.13% in August. These are huge moves in that arena, which handed bond investors severe losses.

The reason for surging yields is increased conviction by traders that that the Fed will no longer talk but start tapering its $120 billion in monthly bond purchases “real soon.” What that means is that artificially suppressed rates due to tapering will now have to face the reality of a “true” market.

Added strategist Kathy Jones:

The market’s been steadily coming around to the reality that yields were awfully low relative to the fundamentals. Now the Fed is shifting, and everybody’s shifting their positions, all at once, as we tend to do.

Not helping matters was the ongoing budget showdown and the debt ceiling debacle, neither one of which exerted any positives towards the market. Uncertainty will keep a lid on any attempts to push equities higher.

Technical damage was done to the indexes, as Zero Hedge pointed out:

• S&P broke back below 50DMA, testing 100DMA
• Nasdaq broke back below 50DMA, testing 100DMA
• Dow broke back below 50DMA and 100DMA
• Russell 2000 broke back below 50DMA

When appropriate, I mention short squeezes and how they are supporting the bullish meme. However, none of that was present today, as “the most shorted stocks” did what they are supposed to, namely head south, and consequently wiped out yesterday’s squeeze gains in the process.

The US Dollar likes rising bond yields and continued its melt up and, during this course of action, slammed gold by over 1%. On the economic side, US Consumer Confidence plunged to 7-month lows, thus enhancing the sour mood on Wall Street.

You can see my latest blogging schedule here.