[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The markets bounced back from yesterday’s beating and regained most of their ground.

Traders are feeling optimistic about the yearend rally and ready to pop the champagne. Almost every stock in the S&P rose, led by Micron Technology, which soared 9% after smashing earnings estimates and raising its outlook.

The bulls were also encouraged by weak economic data and easy money policies, which made them think that the economy is just right, not too hot, and not too cold. They used words like “goldilocks,” “soft landing” and “everything is awesome” to describe their euphoria. They are now betting that the Fed will slash interest rates by 160 bps next year, according to ZeroHedge.

The MAG7 stocks had a mixed day but managed to end in the green. Bond yields edged up but did not spoil the party for stocks. The dollar slipped, giving gold a chance to shine again, while oil had a wild ride but finished slightly down.

I have repeatedly warned that inflation is not dead and will come back to haunt us. The markets and the Fed don’t agree and think that history, as shown in this chart, won’t repeat itself.

Are they right?

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[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The markets have been soaring to dizzying heights lately, but today they came back down to earth a bit. Some traders decided to take some profits off the table after a long winning streak. This is normal and healthy for a bull market, and it doesn’t mean that the fundamentals have changed.

One of the biggest losers today was FedEx, which plunged 10% after disappointing investors with its revenue outlook and quarterly results. The company blamed higher costs, labor shortages, and supply chain disruptions for its woes.

The market’s retreat followed a strong session on Tuesday, when both the Dow and the Nasdaq extended their gains for nine days in a row. Despite today’s dip, all three major indexes are still on track to end the month and the year in positive territory, as investors anticipate lower interest rates from the Federal Reserve in 2023.

But what triggered the sudden sell-off today?

It seems that some exotic options played a role. These are options that expire on the same day they are traded, giving the holders the right to buy or sell the underlying asset at a fixed price.

Today, nearly a million of these options on the S&P 500 expired with a strike price of $475. When the market reached that level, the selling pressure intensified, and the market hit a speed bump. The largest sell program since July sent stocks tumbling.

ZeroHedge summed up today’s action like this:

• 30-year Treasury yield fell below 4.00% for the first time since July
• Odds of a rate cut in March surged
• Expectations of more rate cuts in 2023 soared
• Stocks tanked
• Bond yields plummeted

The short sellers finally had a reason to celebrate, as the most hated stocks suffered their biggest daily drop since February. Even the “Magnificent Seven” stocks couldn’t resist the selling wave and got dumped.

The dollar bounced back and erased most of yesterday’s losses, which weighed on gold. The precious metal slid lower. Oil also closed lower after briefly breaking above $75 yesterday.

If the volatility index (VIX) is any indication, there could be more trouble ahead for the market, as this chart shows.

Will history repeat itself?

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[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The Fed’s dovish statement last week sparked a rally that pushed the S&P 500 close to a record high.

Three rate cuts in 2024, cooling inflation, and lower Treasury yields boosted the market mood in this seasonally strong period for stocks. The Fed thinks it has tamed inflation, but it may be in for a rude awakening.

Oil prices jumped as Yemeni militants attacked ships in the Red Sea, prompting BP to halt its Suez Canal shipments. The U.S. sent more naval forces to protect the vessels.

Housing starts soared unexpectedly, lifting homebuilder stocks. Is this a sign of a housing recovery or a fluke?

SPY, the biggest S&P 500 ETF, saw record inflows of over $40BN in four days, thanks to Powell’s pivot. The most shorted stocks also surged 16% as the bears got squeezed. Bond yields were stable, while gold rose amid uncertainty.

But lower rates are not always good for the market. Lance Roberts, a market guru, points out that the average market drop after a rate cut was 27.25% since 1970. The last three times were even worse.

So, is this rally a gift from the Fed or a trap for the unwary?

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[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The market kept up its winning streak today, with the S&P and Nasdaq scoring big while the Dow barely budged.

The S&P 500 has been on a roll for seven weeks, its longest run since 2017. The index is up more than 3% this month. The Dow and the Nasdaq are also up by more than 3% and 4%, respectively.

The mood improved last week when the Fed hinted at three rate cuts in 2024, saying inflation was cooling off. Treasury yields fell, with the 10-year yield dropping below 4%. Or maybe the Fed just gave in to inflation and got a reminder that 2024 is an election year.

But the market may not have it so easy in the coming weeks. Stocks are pricey and earnings may suffer. The bulls and the bears may fight for control, and it’s not clear who will win.

Traders also got a reality check from the Fed’s Goolsbee, who said the market was too optimistic about the rate cuts. He said the market jumped to the conclusion that the Fed would normalize quickly, but he didn’t see that happening.

That scared the bond market, as yields rose but didn’t reach 4%. A short squeeze fizzled, but the “Magnificent 7 stocks” hit a new high. Apple went down, facing trouble with China and the US over its products. The dollar was steady, gold gained a bit, and oil spiked but retreated.

The S&P’s seasonality chart still looks bullish, but will that last beyond mid-January?

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