We got yet another strong day in the stock market yesterday…even though there really wasn’t any definitive positive news to account for the rally. That’s okay, sometimes the stock market sees something before most other people do…..Anyway, the rally came on the lowest volume since late February…and the breadth was not all that impressive either (just 2.6 to 1 positive for the S&P 500). Thus, this six-day rally seems to be losing some steam. However, that’s okay too. After an 8% bounces off last Monday’s lows for the S&P 500 and a 12% rise in the NDX 100, it would be totally normal for the rally to lose some momentum on a very-short-term basis. This does not mean that it won’t continue, but it does likely mean that it will take at some sort of “breather” over the next few days.
Don’t get us wrong, we’re not suddenly changing our stance to a bullish one. As we highlighted on Monday, the stock market stands at the same level it did two months ago…and yet most of the important headwinds facing the stock market have only gotten worse since then (oil prices, inflation in general, interest rates, supply chain issues, GDP growth, Fed hawkishness, etc.) Therefore, we believe that the stock market will roll back over again before long, but we cannot say that a further rise will not take place before we get a serious reversal to the downside once again. In other words, with the strength of the recent upside momentum…and the end of Q1 just over a week away…it’s not out of the question that the market could continue to hold up…or even rally a bit further…over the very-short-term.
Speaking of the very-short-term potential for certain markets, we’d note that the Treasury market is becoming quite oversold. Again, this is merely a very-short-term condition…and it’s not a wildly extreme one yet. Therefore, the oversold condition of the bond market is not as extreme as China’s stock market was just over a week ago (when we called for a sharp bounce)…so we’re not looking for the kind of sharp/extreme reversal we saw in the Chinese market last week. However, the TLT Treasury ETF (which measures bond prices, not yields) has reached the kind of level that has been followed by short-term bounces in the last year. (Of course, when we say the bond market is oversold, we’re saying that its PRICE is oversold…which means that its yield is becoming overbought. Therefore, if/when Treasury bond prices rise over the very-short-term, their yields will come down.)
We might be a day or two early with this call, but we believe that a bounce in Treasury bond prices (and thus a pullback in Treasury yields) will very likely take place over the next week or so. (We’d also not that the 2yr/10-yr spread is coming off an oversold condition.) Therefore, those with negative bets on the bond market should be quite careful over the coming days. This, in turn, means that the interest rate sensitive groups like the bank stocks could have a tough time seeing much upside follow-through as we head towards the end of the quarter (next Thursday)…..With all of this in mind, we think that investors should be a little less aggressive on the buyside in this group (and the financial stocks in general) over the coming days…and short-term traders should take some chips off the table as well.
Finally, we also want to caution people against assuming that a drop in yields will be positive for the broad stock market. If the any bounce in the Treasury market (drop in yields) is spurred on by a “flight to safety” move in the marketplace, stocks would obviously come under some serious pressure.
Moving back to the broad stock market, absent some dire news on the geopolitical front, we’ll be watching the “internals” on any near-term pullback. If it comes on low volume and breadth that is quite benign, it will point to a further rally between now and the end of the quarter. If it comes on an increase in volume…and breadth that is very poor…it will tell us that the odds are high that a strong reversal to the downside is in the offing.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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