The S&P 500 found support at 3,920 yesterday. But the reaction from investors was a resounding “meh.”
There was no enthusiasm to take stocks higher off of that support point. Think of it like this…
Anybody that bought stocks in the last three weeks is probably breaking even at best. Because the drop came so fast this week, investors may be sitting on losses if they didn’t act quickly. That doesn’t exactly encourage people to run out and buy more…
So, investors might choose to sell stock and take a meager profit or cut losses on any upside move. Like yesterday, the S&P 500 punched into positive territory four times — each time, it was met by selling that drove it back into the red. (This is a perfect example of how “resistance levels” are created.)
The implication is that investors were more worried about further downside than missing a higher move. At least during yesterday’s session….
Investors’ moods can change quickly. What happens one day does not necessarily carry over to the next. Pre-market Index futures are up roughly in line with yesterday’s highs, which could be interpreted as confidence that support at 3,920 held despite a pretty weak overall performance, and maybe there’s some upside after all.
Today’s canary in the coal mine is the yield on the 10-year Treasury bond. It got crushed yesterday, falling to a 3-month low at 3.4%. Yes, that’s lower than the Fed’s current interest rate of 4%. Which seems weird, right? I mean, why would anyone lock money up for ten years to make 3.4% when they could buy a 2-year bond that pays 4.2%?
The reason is inflation, interest rates, and expectations for recession. If you’re convinced a recession is imminent, safety becomes paramount. And Treasury bonds are the safest place on the planet for your money. When bond yields (interest rates) move higher, the face value (the price you pay) moves lower.
Add in the fact that the Fed is going to hike rates higher, and it makes the outlook for the 2-year bond murky. Sure, 4.2% is nice. But if that 4.2% yield goes higher, it means the face value of the bond goes lower, and maybe you’re not making as much money as you thought…
The same is true for the 10-year bond. If interest rates and the bond’s yield go higher, the face value decreases. The big difference is the time frame. With the 10-year bond, there’s a lot more time for something to happen. And for the 10-year buyer, that “something” is a recession that forces the Fed to cut interest rates, which will push the price of the 10-year higher.
Falling yields for the 10-year bond indicate that recession fears are rising.
That’s your Morning Cup O’ Market today.
Take care, and I’ll talk to you tomorrow…
The Profit Sector