Stocks smushed, bond yields blaze, and Fed heads become more cautious

• It was a scene out of Batman & Robin.

• Stocks got beaten up, bond yields kiss 4.7%.

• Eco data suggests brewing inflation.

• FED commentary becomes more ‘cautious’.

• Markets Closed on Thursday.

• Try the Manfredi con La Ricotta.

Oh boy, it was like a scene out of Batman and Robin (circa 1967) when they had those fight scenes that featured the words in the bubbles (millennials and Gen Z’ers won’t understand that reference) – like ‘Ka-Boom”, “Pow”, ‘Bang’, ‘Zap’, ‘Crunch’, ‘Biff’, ‘Crack’, ‘Klonk’ and ‘Wham!’. Because that is what it felt like yesterday as we witnessed the damage that rising bond yields would do to stocks.

Yesterday saw lots of action in the bond market – first we had a $39 billion sale of 10 yr bonds that drew the highest yield since 2007 and then we had a flurry of corporates (11 companies, raising $18 billion) which also put pressure on the markets.

(Refer to Monday’s note -we discussed this whole issue and we discussed how Janet (Yellen) has been masking a much bigger issue for investors and for the markets. Here is the link - https://open.substack.com/pub/kennypolcari/p/from-holiday-dip-to-market-flip-algos?r=cfrgv&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true)

2 yr bond yields rose 2 bps to end the day at 4.29%, 10 yr bond yields were up 5 bps to end the day at 4.68% but not before testing 4.6972%....the 30 yr bond rose 4 bps to end the day at 4.914%....leaving that bond teasing the October 2023 yield of 5.18%.

The eco data being seen as the culprit – JOLTS Reports….Job Openings totaled 8.098 million vs. the expected 7.74 million….meaning there are more jobs available – which means that businesses will likely have to pay higher wages to attract qualified candidates (think what higher wages mean…) and then we got the ISM Services PMI that came in stronger – at 54.1 and the Services Prices Paid surged higher…coming in at 64.4 vs. last month’s 52.10- a 23% surge in that datapoint. Prices paid – means higher costs of services employees and remember – we are a 75% services economy…Capisce?

I wonder if those Goldman Sach’s analysts who said that they were witnessing a ‘tactical bullish setup’ for stocks driven by institutional money and ‘lack of selling’ think now? Apparently yesterday, there was NO lack of selling….as stocks got ‘whacked’. Remember – it isn’t a lack of selling at all - as every trade has both a buyer and a seller. It was (as I described in yesterday’s note) the tone of the day….and yesterday’s tone was, shall we say, a bit negative…..and that caused sellers to become more aggressive, leaving buyers to have their way and take control and prices fell….Again, This isn’t rocket science – it’s just Econ 101, Supply & Demand.

And then those highly paid JPM guys who also told us point blank that ‘while risks to the fierce rally are mounting, a bearish downturn remains ‘extremely unlikely’ amid strong economic growth’. The key phrase there was ‘extremely unlikely’. Watch what happens next!

And then I told you to keep your eyes on the VIX – the fear index – and to watch it as it was feeling a bit anxious to me….with all the trendlines converging between 16.15 and 17.25 and that a push up and through 17.25 will see the VIX spike and stocks retreat. The size of the move lower will depend upon the headline that causes the spikes to be higher. Well the VIX surged - UP 11.10% and stocks ended the day lower.

The Dow lost 178 pts or 0.4%, the S&P lost 66 pts or 1.1%, the Nasdaq got smacked – down 375 pts or 1.9% (and no one should be surprised at all), the Russell gave back 16 pts or 0.75%, the Transports bucked the trend, rising 38 pts or 0.25% while the Equal Weight S&P lost 24 pts or 0.35%. In addition, the Bloomberg Total Return Mag 7 Index (BM7T) lost 711 pts or 2.5%.

Now, do you see what happened? The S&P got whacked (down 1.1%) because all of those mega cap tech names (think Mag 7) got smushed and taking that market capitalization index lower, while the Equal Weighted S&P was only off a fraction – Why? Because the bulk of the selling was the overcrowded TECH trade and that includes the Mag 7 plus all those other TECH sectors we have been discussing and since they are equal weighted in the Equal Weighted Index and not cap weighted in that index – their losses were not amplified.

At the end of the day the XLK lost 2%, the Semi’s – SOXX – 1.4%, Disruptive Tech – ARKK gave up 3.7%, Quantum Tech – QTUM lost 1.3% and those really volatile names in that sector got punched in the face and the gut. IONQ – 3%, RGTI – 5.7%, QUBT – 3.3% while QBTS gave up 6.5%.

There were though – two sectors in the S&P that ended the day higher….Healthcare – XLV + 0.5% and Energy – XLE +1%, and btw – they were 2024 underperformers (just sayin’) - all of the others came under undue pressure with Consumer Discretionary, Basic Materials and Communications getting hit the hardest - falling 1.9%, 1.35% and 1.1% respectively…..

As you can imagine the contra trades had a great day…the DOG + 0.4%, the PSQ gained 1.8%, the SH + 1.1%, the SPXS (triple levered S&P short) gained 3.3% while the VIXY ETF added a healthy 6.2%.

Now look – we are hearing from a number of different FED heads, and the story seems to be ‘changing’ just a bit – clearly getting more cautious in their comments. The latest – Atlanta’s Raffi Bostic telling us that ‘officials should be cautious give the uneven progress on lowering inflation’. This follows Fed Governor Lisa Cooks comments on Monday where she also warned of continuing to cut rates due to ‘stickier inflation’.

Today we are going to hear from Fed Governor Chrissy Waller (who plays on both sides of the fence – hawk then dove - so let’s see what he is today!) and then tomorrow we will hear from Philly Fed President Patty Harker (who calls himself an ‘eagle’ which means he won’t commit), Richmond Fed President Tommy Barkin (on the fence), Kansas City Fed President Jeff Schmid (moderately hawkish) and Fed Governor Mishy Bowman (leans hawkish) all speaking as well – so there will be a lot to unpack after we hear what each has to say. Remember – stock markets are closed tomorrow in observance of President Carter’s Funeral.

Eco data today include Mortgage apps and the ADP employment change – and that is expected to show a gain of 140k new jobs. At 2 pm – we will get the December FOMC mins – where we might get a bit more clarity on who voted yes and who voted no and why.

Oil continues to churn in the $74.30 range. Nothing really new to drive the action.

Gold also continues to churn in the $2625/$2675 range…. This morning it was flat at $2,664.

The dollar is trading at 109.10 – up 8% in the last 3 months. And this will continue to be a headwind for commodities. As the dollar gets stronger – commodities should weaken – think the inverse relationship. Gold is down 5.75% during that same time frame. The Bloomberg Commodity Index – BCOM – is down 3.5% during the same time.

Oil – while a commodity – is up 17% during the same period but remember – oil prices are driven by other factors that sometimes cause oil to buck the trend. (Think the ongoing China drama – this week China demand is hot, next week it will be cold – whatever! Think sanctions on Russia and Iran, think production cuts by the Saudi’s…) Now, if these issues were ‘not’ issues, then I suspect that oil would be lower not higher.

US Futures are confused….…. It feels like a dead cat bounce to me….…. Dow futures up 85 pts, S&P’s up 11 pts, Nasdaq is up 45, while Russell is down 5 pts.

I still think that the first quarter will continue to be volatile as investors, traders and algo’s digest all the crosscurrents that plague the markets….Earnings start next week, the Inauguration is on the 20th, a new administration is coming, new policies are set to take place. Inflation is trending higher; tariffs are a real possibility. Canada and Greenland may become part of the US, and the Gulf of Mexico is about to become the Gulf of America all while the Panama Canal is the latest issue to be exploited by the Chinese. Trump warns Hamas to give up and release the hostages before he takes office otherwise ‘all hell will break loose’. And while much of this won’t price stocks in the long term, it has the ability to create short term chaos.

European markets are all lower…. France once again leading the way – down 0.8%. German industrial orders fell unexpectedly and that is causing some angst. Investors across the zone are awaiting the latest European consumer confidence and economic sentiment data – due out at any moment.

The S&P ended the day at 5909 – down 67 – we are now once again below the trendline at 5944 – so that did not prove to be support at all. It has once again become resistance. The KEY data point this week will be Friday’s NFP report – expect lots of speculation and positioning ahead of this data point today since markets are closed tomorrow. Today’s ADP report may offer some clues on what we can expect….

Remember – stay focused, manage your risk, stick to the plan. History demonstrates that a well-planned, long-term focused and diversified financial plan can withstand virtually any market surprise and related bout of volatility.

Manfredi con la ricotta

This is a Neapolitan classic. Manfredi pasta - aka Mafaldine – is a ribbon shaped pasta with ruffled edges – the name suggests royalty or nobility and this pasta works well with this dish.

For this you need: 1 large onion – sliced in half, olive oil, garlic clove, s&p, fresh basil, fresh ricotta, fresh grated parmegiana cheese, 1 can of crushed tomatoes, and the pasta.

Bring a pot of salted water to a rolling boil on the back burner.

Start by heating up some olive oil in a large sauté pan. Add in the onion. (Just sliced in half – do not chop the onion) and the garlic clove (not sliced) Sauté for 5 mins – turning the onion over….

Now add in the crushed tomatoes, season with s&p. Allow to simmer on the stove for 10 min.

While that is simmering – add the ricotta cheese to a bowl, add in 1 ladle of hot water and a handful of the parmegiana cheese. Season with s&p. Mix until it becomes nice and creamy.

Add the pasta to the water and cook for 8 mins.

Now, Remove the onion and the garlic clove from the sauce. When the pasta is done – add it directly to the sauté pan. Mix to coat the pasta. Now add in 2 tblspn of the ricotta and ½ ladle of the pasta water – (tears of the Gods) and mix well.

Serve in warmed bowls – add a dollop of ricotta and a dusting of cheese. Top with fresh basil. Delicious and so simple….