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Investors Say “Meh” & Watch This Canary in the Coal Mine

Morning in the Markets

Briton Ryle by Briton Ryle
December 9, 2022
in Analysis
0
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The S&P 500 found support at 3,920 yesterday. But the reaction from investors was a resounding “meh.” 

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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…

brits-sig

Briton Ryle
The Profit Sector

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Tags: BondsInflationInterest RatesRecessionS&P 500The FedTrading Stocks
Briton Ryle

Briton Ryle

I’ve been trading, investing, and sharing my insights with individual investors since 1998.  Back then, the internet was not a very useful research tool. Armed with a library card and a huge budget for the printer, I’d scroll the microfiche for Wall Street Journal and Financial Times articles. I bought technical books on wireless technology and fiber optic networks. I traveled to Chicago to learn the secrets of stock options trading directly from the experts on the floor of the CBOE.  I’ve attended and spoken at more investor conferences than I can remember…. All because I’ve always taken my responsibility to my readers and subscribers very seriously. I refuse to parrot popular opinion, offer up half-baked ideas or publish incomplete or half-hearted research.  There is no shortcut to deep research... becoming as close to an expert on topics, trends, and technology as possible. And the rewards are life-changing. The very first stock I ever recommended was South Korea’s SK Telecom. My readers enjoyed a 150% profit in a matter of months.  And after 25 years, I’ve helped tens of thousands of readers change their financial fortunes.  A few months ago, I donated all my suits to Goodwill, pulled my name off the list of speakers for the big investor conferences, and left the big city for Southern Georgia. The plan was to retire to the banks of a tidal creek that splits off from the St. Mary’s river as it enters the Atlantic between Cumberland and Amelia islands... and trade stocks when I felt like it. But, I guess retirement wasn’t for me after all. I’m back, and this is gonna be something special. 

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© 2022 The Profit Sector, LLC. All rights reserved. Our website provides stock market research, commentary, and analysis. Information is provided “as is” and solely for information purposes, not for trading purposes or advice.

Nothing on this website should be considered personalized financial advice. Any investments recommended herein should be made only after consulting with your personal investment advisor and only after performing your own research and due diligence, including reviewing the prospectus or financial statements of the issuer of any security. The Profit Sector, its managers, its employees, affiliates and assigns (collectively "The Company") do not make any guarantee or warranty about the advice provided on this website or what is otherwise advertised above. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. The Company is not affiliated with, nor does it receive compensation from, any specific security. To the maximum extent permitted by law, the Company disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations provided herein prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

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