1. Moving the markets

The stock market had a rough day on Wednesday, after the S&P 500 got too close to its glass ceiling and bounced back down.

It was a busy day for earnings reports and rising interest rates, which made investors nervous and jittery. The 10-year bond yield jumped over 4.9%, the highest since 2007. That’s bad news for anyone who wants to buy a house, because the average 30-year mortgage rate just hit 8%, the highest since 2000. Ouch!

Earnings were a mixed bag, with only 10% of the S&P 500 companies reporting so far, according to FactSet. Most of them beat the low expectations, but that’s not saying much. The real question is what they expect for the future, and how the interest rates will affect their business.

Chip stocks like Nvidia and AMD had another bad day, as the U.S. government decided to limit their sales of AI chips to China. That’s a big blow to their growth prospects, and traders were quick to dump their shares.

The war between Israel and Hamas also weighed on the market, as investors flocked to gold as a safe haven. Gold prices soared again, along with energy and oil stocks. They were the only ones having a good time on Wednesday.

Banks were among the worst performers, especially Morgan Stanley, which dropped more than 6%. That was its worst day since June 2020. The short squeeze craze also fizzled out, as small-cap stocks took a nosedive.

With the AI sector in trouble, could we see a repeat of the Covid/Crypto boom and bust? Or is this just a temporary setback for the tech giants?

1. Moving the markets

The markets were like a roller coaster on Tuesday, as investors felt the heat from rising bond yields.

But they also got some relief from the third-quarter earnings season that kicked off with a bang. The 10-year U.S. Treasury yield soared to 4.84%, the highest since Oct. 6 — when it was a hair away from 4.9%. The reason? Retail sales data that came in hotter than a jalapeño, after plunging 5.4% in September.

Higher yields have been a thorn in the side of the market for weeks, as traders worry about the Fed tightening the screws for longer than expected. They also wonder how the Israel-Hamas war will affect the global economy.

It’s all about the bond market these days, as usual. The trend of higher yields, that started in July, is back with a vengeance after a brief pause. But there’s a silver lining: the 3rd quarter earnings season has been off to a good start, easing some of the traders’ fears. The question is: can that last, or will higher yields spoil the party?

Homebuilder Sentiment took another dive, hitting a 9-month low, while US Manufacturing Production shrank YoY for the 7th month in a row. The Service sector also tanked in October, reaching its lowest level since January.

These headlines confirm what traders already think: the economy is going downhill, and the Fed needs to cut rates to save the day. But what if they don’t?

Financial conditions have gotten worse, with rate hike expectations rising, which is bad news for stocks. But traders seem oblivious to that, even though they saw another bond sell-off due to soaring yields.

Just look at this: the 2-year yield hit 5.23% today, which is crazy considering the 2006 high was 5.275%. The last time it was higher than that was in December 2000, according to ZeroHedge.

The same thing happened with the 5-year yield, which reached 4.88%, the highest since July 2007. Ouch! No wonder mortgage rates are creeping up to the 8% mark, the highest in more than 23 years.

But thanks to another short squeeze, the S&P 500 managed to touch its resistance level, which matched its 50-day M/A. NVDA got hammered, the dollar ended flat, while gold moved sideways but closed slightly higher.

This makes me curious: how long can this gap between higher yields and rising stocks last? This chart has the answer, but we don’t know yet if it will be a snap down or a snap up.

1. Moving the markets

Traders had a lot on their plate on Monday: a flood of corporate earnings reports, rising bond yields, and simmering tensions in the Middle East. But they chose to focus on the positive and pushed stocks higher.

The S&P 500 rose by about 1%, but it still faces a hurdle: the top of its downward trend channel that started in July. Could it break through this barrier and end the bear market rally? It needs another 0.75% boost to find out.

This week, 11% of the S&P 500 companies will report their earnings. Some big names include Johnson & Johnson, Bank of America, Netflix, and Tesla. Will they beat expectations or disappoint the market?

Wall Street traders are not relaxing yet. They know that volatility could spike by the end of the year, as bond yields and oil prices climb, inflation stays high, and conflict brews in the Middle East.

But they are also hopeful that earnings and the Fed will save the day. Powell will talk about interest rates and policy outlook on Thursday at the Economic Club in New York. Will he be dovish or hawkish? Will he taper its bond-buying program or keep it steady?

As for our Domestic Trend Tracking Index (TTI-section 3), it is still in bearish territory, meaning that the overall market trend is down. We are waiting for a signal to change our portfolio allocation.

In the meantime, trading in equities may be rangebound. The Middle East conflict is like a chess game that could turn violent at any moment. But earnings are like a ray of sunshine that could brighten up the market.

For now, traders are ignoring the dark clouds and enjoying the sunny day. They are driving equities higher, even as bond yields rise. As ZeroHedge showed in this chart, we have seen this movie before, and it did not have a happy ending.

The short squeeze strategy finally worked today, after failing for three days. The dollar fell, crude oil slid, and gold paused after soaring last week.

This week, we will also get some economic data on retail sales and housing. And we will hear from several Fed speakers, including Powell. Will they sing in harmony or discord?