QVMM - Markets On Edge
2023-10-16 11:05:00 ET
Summary
- Our proprietary signal has flashed red twice in the last several weeks. Does the double signal something more ominous approaching?
- The Fed pointed to the soaring 10-year yields and term premiums as indicators that its job of tightening monetary policy had essentially been done, hinting that there might not be any more interest rate hikes in the near future.
- In an inflationary environment, the broader stock market may face struggles while commodities and precious metals are expected to flourish.
As we have written in the past, markets are assaulted by news every hour of every day. Why does the market move sometimes, and other times it is unaffected? It is all about positioning. Our proprietary signal that we have written about recently indicated that markets were not ready to handle a market-moving event, and we needed to batten down the hatches. When we get our signal, we don’t know what the event is that’s coming. We just know that it is going to have an impact. Our proprietary signal has flashed red twice in the last several weeks. That doesn’t usually happen. It’s usually one and done and volatility comes roaring back. Does the double signal something more ominous approaching? I guess we will find out. We’ve never seen it before.
Fed chairs were out on their soap boxes this week talking about the market. They all pointed to the soaring 10-year yields and term premiums as indicators that the Fed’s job of tightening monetary policy had essentially been done. In other words, they hinted that there might not be any more interest rate hikes in the near future. Why? Markets were going down. Markets heading south tighten financial conditions. It does the job of the Feds for them. This has led to the market’s anticipation of the first rate cut from the Federal Reserve, expected in June 2024. Conversely, if the market begins to head higher, it will be back to work for the Fed and higher rates.
For the last 40 years, we have been in a more deflationary environment. At the end of the rate hike cycle, investors had done well to jump back in and buy stocks. This time might be a little different. The historical data tells us that in an inflationary environment, we should not buy the last rate hike. As a note, the S&P 500 is down 5.3% since the last Fed hike in July. In an environment marked by inflation, it’s anticipated that the broader stock market may face struggles while commodities and precious metals are expected to flourish. We saw this on Friday. While the broader stock market was lower, our portfolios were higher due to our heavy concentration of oil and gold.
We are watching the bond market tick by tick. The bond market is acting as a governor on Congress’ spending. The monstrous deficit spending is causing a major pause in bond buying for investors. Our research leads us to believe that it is possible that we find a tradeable bottom in November 2023. This could lead to a rise in the 10-year rates, approaching the 5.25% mark.
The troubles in Palestine have the market on edge, and market participants are rushing to hedge buying puts, gold, and oil futures. Our emphasis on oil and gold has undoubtedly helped us out this week.
The S&P 500 closed at 4327. 4200 is very important. We are at an inflection point in the market and it is decision time. 4200 must hold. Small caps never go the bulls’ memo and are approaching a must-hold area. A breakdown there could send the Russell 2000 down another 20%. If small caps hold and the S&P 500 holds 4200, we will most likely rally into the end of the year. We are going to need to be very nimble here.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Markets On Edge