Bonds Seem to Get It: Fed Won't Cut Rates Anytime Soon
Michael Kramer | Sep 27, 2023 03:20AM ET
Stocks finished yesterday lower by around 1.5% on the S&P 500, while the Nasdaq 100 QQQ declined by about 1.5%. Meanwhile, rates continued to climb, with the 30-year climbing to about 4.69%, as the dollar index pushed to around 106.20. This is now leading to spreads finally showing signs of moving higher and the VIX moving up.
The S&P 500 clearly broke a key support level at 4,330 and never looked back. That was the bottom of the neckline for the head and shoulders pattern and/or the diamond reversal pattern. The move lower is pretty impulsive, which makes me believe we are in wave three down and not an ABC corrective wave.
This does help us in some ways because what comes next after this sell-off ends is a sideways or slight move higher for wave four and big impulse wave five down. The chart below doesn’t represent any “projections”; the numbers are there for illustrated purposes to give a sense of potential direction.
At this point, it is clear that the market bet on the Fed cutting rates aggressively at the end of this year and the start of next year. It was a horrible bet because the Fed told you for almost 18 months that once rates got sufficiently restrictive, they would need to be held at those higher levels for a long time.
Bonds seemed to get it; that was clear from very early on. I think bonds underestimated how high the Fed would raise rates. Now that we know what the Fed is thinking about holding rates and that the neutral rate is potentially higher than 2.5%, rates on the back of the curve are adjusting for those higher rates.
Stocks bet on rates not staying higher for longer and lost. I have written about this many times. This is why I remained bearish even as the market rose, adding to my cash holdings over the summer.
Now CTAs have turned sellers, and based on data from Goldman, could have $37 billion of S&P 500 to sell in a down tape over the next week. This means that this is no longer just a rising rate sell-off. We have the CTAs now selling, which will add another layer of complexity. At this point, It seems like the path of least resistance for the SPX is lower.
h2 Rates Set to Keep Moving Higher/h2The path of least resistance seems higher for rates, and it seems possible at this point that the 30-year rate could move higher, and the next big level of resistance for the 30-year doesn’t come until 4.77%, and that is where there was a double top that formed in January 2011. After that, resistance comes around 5.4%. It sounds impossible, but remember, we have a Fed Funds rate of 5.5%, which is not crazy.
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The VIX saw its highest close since the end of May at 18.9. This could be important because the 18.5 level certainly served as a support and resistance zone for a long time, and crossing back above it could tell us what comes next, which is a higher VIX. Likewise, one day doesn’t make a trend, so seeing where the VIX goes tomorrow will be important.
The KOSPI has also been beaten up, falling below a key support level that goes back to August 2022 at 2,500, a level that had been resistant multiple times and at this point. The drop below 2,500 suggests the recent rally was a failed breakout attempt. This is important because the move lower is not only in US equities.
The DAX finds itself in a similarly bad position as the S&P 500, the KOSPI, and many other markets globally.
I don’t have much else to add; we are seeing nothing new and the same thing I have been writing about for months. I could get into some ETFs and even individual stocks, but all the charts look roughly the same at this point.
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