We had a very mixed day in the stock market. The S&P 500 and Nasdaq declined, while the DJIA and the Russell 2000 rallied. We had a similar divergence among the groups, with the energy and financial sectors rallying strongly, while the tech & healthcare sectors took it on the chin.
This is very reminiscent of what began playing-out about a year ago. Back in early August of 2020, the yield on the 10yr note re-tested its March lows of 0.5% and started to rise. Once it became evident that this signaled a change in trend for long-term rates, the tech stocks began to roll-over and the small cap value stocks started to bounce. This was followed by a broad correction in the S&P 500 and Nasdaq composite, AND a multi-month period where the tech stocks underperformed and the value names outperformed (value over growth).
This year, a multi-month decline in rates bottomed in early August once again. It was not a “double-bottom” like it was last year, so it took a bit longer to confirm that a bottom of some importance was put-in. Once that took place (when the 10yr yield broke above the key 1.4% resistance level in a meaningful way), we have started to see the same kind of “rotation” out of growth and into value that took place last year. Of course, it’s too early to say that this change in trend will be as strong (or last as long) as it did last year, but given that the yield on the 10yr note have moved WELL above their key resistance levels (as has the spread between the yield on the 2yr & 10yr notes), it is our opinion that it is VERY likely that this new “rotation” move will last for a lot more than just a couple of weeks.
When rates were rising rather sharply in February and March of this year, most pundits said this was nothing to worry about because it merely meant that demand was improving and thus everybody could afford the higher cost of money (due to the improving economy). However, it is now becoming clear that the rates are rising this time around due to supply issues, not demand ones. Unlike demand-induced inflation, supply induced inflation is NOT “good inflation.” It does not signal an improving economy. In fact, it CAUSES the economy to slow down. No, it does not necessarily cause a recession, but it DOES create headwinds for the economy. More importantly, it causes interest rates to rise EVEN THOUGH the economy is not improving! Since today’s extremely expensive stock market is dependent on HIGHER growth, it’s very hard to provide an extremely bullish argument for the stock market right now.
The inflation concerns are only growing. Experts are once again pushing out the timing for how long these supply chain issues will be with us, so that (by definition) means that inflation is only going to get worse. We also have an energy crisis building in China and Europe (much of which is due to supply chain issues) and we have a ruined harvest in Brazil (due to a drought that was followed by an unprecedented early thick frost) that has pushed food prices much higher worldwide. Finally, we have wage costs shooting through the roof as people seem to be happy to sit at home rather than work for low pay.
Wow, what a time for Congress to be facing a government closure and the Federal Reserve to be facing the appearance of conflicts of interest issues. Today, Fed Chairman Powell will be testifying in front of Congress today and we’re sure he’ll get some questions about this issue. However, given that the rules allow members of Congress to engage in a wide range of trading on information that could be considered insider trading (just ask Nancy Pelosi’s husband), we doubt it will be the focus of today’s Q&A session. Therefore, we expect most of the discussion to revolve around inflation and the timing & pace of “tapering” and rate increases.
Both the S&P 500 and the Nasdaq have been able to regain their 50-DMA’s recently, but only in a very slight way. The futures are trading lower this morning with the further rise in long-term rates (and the steepening of the yield curve), so both indices look like they’ll fall back below those their 50-DMA’s this morning. That key “old support” level is now the “new resistance” level, so if they fail to hold above those lines, it’s going to be a problem.
Having said this, if this rise in long-term rates (or some other issue) causes the stock market to roll back over, the more important support level is going to be the intraday lows from last Monday. (Those lows stand very near their 100-DMAs.) If the S&P 500 breaks below last Monday’s intraday low (of 4,305), that will give it a key “lower-high/lower-low” sequence, and THAT would not be good at all. It would signal a change in the intermediate-term trend for the stock market, and we believe it will be followed by a rather quick decline down to the 200-DMA (which now stands at 4,125).
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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