Stock Market Volatility Picks Up As Financial Conditions Tighten
Michael Kramer | Nov 24, 2021 02:34AM ET
If you were only watching the stock market on Tuesday, then you missed the carnage that continued in the bond market and was now spilling into the corporate and high yield markets.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG) and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) fell again yesterday, with both ETFs seeing considerable damage.
The LQD fell below $131 and may very well be heading towards $130, a sign that rates on corporate bonds were rising.
All of this tells us that financial conditions are now tightening in anticipation of a Fed that will be more hawkish in 2022. Today may prove to be the nail in the coffin for the doves, with the Fed minutes coming out at 2 PM. Fed governors Clarida and Bostic may have provided a message when they recently said a faster taper may be warranted, or something to that effect.
I expect the Fed minutes to indicate that a faster taper will be discussed at the next FOMC meeting. Given the Fed left the optionality for a faster taper in the FOMC statement from the November meeting, it seemed highly likely the language in the minutes will be decisive. That will give the market until Dec. 15 at 2 PM to break Fed Chair Jerome Powell into submission and not taper faster. Especially when yesterday's flash PMI data was weaker than expected and indicated the US economy slowed in November.
It may not seem evident when looking at the broader averages, but in the bond ETFs, the dollar index, and the Treasury market, you see massive shifts taking place. All of this was pointing to tightening financial conditions, which are not favorable for stocks.
h2 S&P 500/h2The S&P 500 has now seen its RSI, MACD turn lower, a sign of declining momentum. Additionally, the advance/decline line continued to plunge. Not exactly indicators that suggest the market was ready to race higher.
More importantly, look at the First Trust Dow Jones Internet Index Fund (NYSE:FDN); Tuesday saw it close on support at $233, and more importantly, right on an uptrend that dated back to September 2020.
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PayPal Holdings (NASDAQ:PYPL) has been hanging on for dear life around this $190 region. It needs to hold here, or this thing is toast. Last week, I noted some bullish option buying in this stock, but I don’t know. I’m getting concerned about it.
On Tuesday, I noted that Alibaba Group Holdings (NYSE:BABA) looked like it wanted to fill the gap back in 2017. That’s just brutal.
Well, Roku (NASDAQ:ROKU) was now at the point where it was $228. It could be a do or die moment for the stock as it sinks into oblivion on its way to $193 and then $151. The RSI doesn’t tell me this stock was close to a bottom yet. It may get a dead cat bounce, but not the bottom.
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