Stocks Rally For Some Mysterious Reason
Michael Kramer | Aug 26, 2022 12:55AM ET
Stocks finished higher yesterday; I don’t have a good explanation for it. Maybe it was those stellar results from Salesforce (NYSE:CRM) and NVIDIA (NASDAQ:NVDA). But the VIX did drop, which suggests implied volatility selling, which seems beyond odd heading into an event today with Powell expected to speak. The market doesn’t see a significant risk in speech and expects nothing new, I guess? That is the only takeaway I can come up with, given the price action.
There is a gap around 4,230, which still needs to be filled, so perhaps the game plan is to fill that gap today. Regardless of whether that gap fills or not, unless Powell is uber dovish, which is not the view of any of the Fed officials I have heard, the dollar index, or the bond market. I believe the S&P 500 will continue on the road lower towards 3,950. Does that mean we could go up and fill the gap at 4,230? Sure, why not? The market is never that straightforward nor easy to understand.
Obviously, if Powell is uber dovish and says he will start cutting rates as soon as the unemployment rate ticks ten bps higher, then maybe I would have to reconsider things. But I doubt Powell will be too far off from his other officials and should be on message with their views.
The VIX index fell yesterday to close back below 22, surprising given the speech today. I’m surprised by that because the equity market has been on a dovish pivot kick for weeks now, and given the nearly 19% rally off the June 17 lows, a 3% pullback doesn’t seem significant enough to adjust for the risk of a more hawkish Powell. But then again, perhaps the thought process is that Powell has to be hawkish, so anything he says by default is more dovish than expected. Or if he blinks two times in a row, it is a sign he is nervous about what he is saying, so therefore he does not mean it. Who knows, but the VIX fell yesterday, again seems odd.
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Rates fell yesterday, and that significant decline started right around 1 PM. Do you know what happened at 1 PM? No, not a Fed official talking, but a solid 7-year bond auction. That sent rates lower across the curve. The 10-year is in an uptrend that has not broken yet, and it has moved up a lot since August 10, so I don’t think there is anything more going on here.
Oddly, a company can miss revenue guidance numbers by 15%, trade at 39 times next year’s earnings estimates and 14.1 times sales, but the shares can rally because all the news has been “priced in.” I have never seen a company miss revenue guidance by 15% and have all the bad news be “priced in.” How would anyone have guessed that big of a miss? So maybe the market wasn’t playing with all of its marbles today. But you want to know the good news? The good news is that the gap for NVIDIA is filled, and now it is free to trade lower again. I guess everyone was selling their puts because the stock wasn’t dropping enough.
It reminds me of when Amazon (NASDAQ:AMZN) rallied because it had “blown out” earnings due to Rivian (NASDAQ:RIVN). Remember that? That was funny.
Or like that time that Advanced Micro Devices (NASDAQ:AMD) gave better than expected full-year guidance because AMD’s consensus analysts’ estimates didn’t include the addition of Xilinx (NASDAQ:XLNX). That was cute too.
Or like how the QE taper was “priced-in” back in January. Yeah, that was funny.
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