Rising Rates Are Wreaking Havoc On Stocks And It May Only Grow Worse

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MARCH 18, 2021



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It was an ugly day for stocks, and with options expiration tomorrow, it could grow uglier from a volatility standpoint, and I expect more volatility next week as well. This is more from a mechanical standpoint, as options expire and market makers need to unwind or put new hedges in place following expiration.

The markets themselves today weren’t pretty, but we have seen this show before. Big moves down, followed by violent moves up. It really begs the question, what’s next. There are plenty of die-hard bulls who believe the market will go up, while bears will proclaim, this is it. Hard to say for certain. We saw the same violent moves lower in September and then at the end of February, only for the S&P 500 to go on and make new highs each time.

I think this time is different, mostly for the NASDAQ names, the S&P 500 can diverge for a little bit longer, depending on a few outside factors. Higher rates are having a dramatic effect on multiples and valuation, especially among those overvalued technology names. Unfortunately, there is a significant difference in a 1.75% 10-year and 50 bps 10-year and how a model spits out a valuation for a stock. So suddenly, what seemed cheap at 50 bps, is not so cheap at 1.75%.

I think there is a realization now that rates aren’t likely going below 1% for a while, and that means investors across the spectrum and are now plugging that new variable into their model. Their models show things that aren’t pleasant, so you see positions unwind.

Additionally, for the first time in a while, the 10-Year is about 30 bps higher than the S&P 500 dividend yield, and that really does make the 10-year more attractive on a relative basis. So if yields don’t come down soon, the S&P 500 yield will need to begin to rise to catch up to the higher rate environment.

The S&P 500 currently trades around 1.45%, which means a 30 bps rise sends the dividend yield to 1.75%, which doesn’t sound like much. But consider that the dividend is around $57.65, so at 1.75%, the S&P 500 is valued at 3,293. So a 30 bps rise in the S&P 500 dividend yield is a huge decline.

There is a gap that needs to be filled around 3,900, and that could be a great place for the index to open around tomorrow because there are a lot of open interest levels for both calls and puts there. The problem is there is another gap down at 3,820.

Zoom (ZM)

Anyway, Zoom didn’t have a good day, and the stock is likely looking at a gap fill at $309. If $309 fails, then $275 is likely coming very quickly.

Roku (ROKU)

Not a good day for Roku either; the stock, based on the chart, appears it is likely heading back to $275.

Anyway, very late. That’s all. Super busy today.


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