Stocks Rebound But Big Risks Lie Ahead

 | Sep 16, 2021 01:46AM ET

The bulls took charge and avoided disaster by holding the S&P index above the 4,440 level yesterday. Not much was really accomplished with the index basically returning to Wednesday’s highs. For now, the trend is still lower, with the next big trend level to watch for coming around 4,500. I think there is a lot of risk going into the end of this week and next.

The Fed will start tapering before year-end. It is just a matter of when they start tapering, September or November. Additionally, this meeting will give us the famous dot-plots, with a chance for some of those expectations for when rates start to rise being pulled forward. There is no reason for the Fed not to taper, GDP growth at 3.7% is robust, and U6 underemployment reading below 9% is solid.

A tapering announcement should result in the 2-year rising and TIP yields rising. I fear that it will result in the long end of the curve falling, though, and there is the big risk. With TIPS and the 2-year rising spreads across the yield curve will contract, and inflation expectations will fall. I think this will happen because rates globally are very low, which will suppress long-end rates, coupled with the fear that global growth is slowing. But the bond market will not be able to fight the Fed at the short-end of the curve, pushing shorted dated rates higher.

These spread changes are risk-off indicators if they play out, which will be a big problem for the market as we move forward. For now, resistance is around 4,500 if it should continue to rebound tomorrow after rising out of this rising wedge pattern yesterday.