Why Bears Got The Interest Rate Trade Wrong

Thursday was a good day for the S&P 500 with the index notching yet another record close. That’s miles from last week’s apprehension over the looming stock market collapse.

It’s been a few weeks since the last record high, but more important is this rebound extends the trend of higher-highs. As much as the cynics try to bash this market, fragile markets don’t keep making new highs. That confirms this a strong market, not a weak one.

The other nice thing to see Thursday was was a modest decoupling between bonds and stocks. Previously, stocks were rising and falling at the mercy of the bond market’s whims. Thursday, the bond market was mostly flat while stocks staged this nice rally to record highs.

But this shouldn’t be a surprise. As I wrote last week, stock investors are not afraid of these historically low 1.5% interest rates. They were worried this surge would continue to 3% and beyond. But so far, yields are settling in around a very reasonable 1.5% and that level seems good enough for the equity market.

Every pullback feels real. By rule, it has to. That’s because if it didn’t feel real, no one would sell and prices wouldn’t drop. Buying last week’s bounce was hard, but so far it looks to be the right call.

The thing to remember is risk is a function of height. The higher we are, the further we have to fall. And the opposite is true. The more the indexes pullback, the closer we are to the next bounce.

It is hard to buy when everyone else is predicting a collapse, but that is often the safest time to be buying. If a trader waited until today’s “conformation”, they would be getting in at record highs. The trader that took a chance on last week’s bounce already has a nice profit cushion protecting their trade.

Start small, get in early, keep a nearby stop, and only add to a trade that is working. That’s how we keep ourselves out of trouble.

Tesla (NASDAQ:TSLA) is riding on the coattails of the index’s rebound and has bounced hard off of Monday’s lows. Was this capitulation and enough to end the 40% collapse from the highs?

That’s a good question we cannot answer it right now. It’s been a long time since this stock followed anything remotely close to fundamental analysis. That means this is a momentum trade and either momentum is still behind this stock or it’s not. With a PE measured in the thousands, there is no option other than another race higher or a spectacular collapse.

TSLA’s bounce is buyable above $600. On the other hand, this turns into a strong short if this rebound fizzles and the stock retreats back under $600.