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It was a pretty rough day in the market. The S&P 500 finished down about 2.7%, but it could have been worse—we were trading as low as 5,560, about a 3.25% decline. The Nasdaq ended the day down about 3.8%, shy of a 4% drop.
Some critical levels were breached today; we’ll have to see how this plays out. We closed below 5,620, which might seem like a random number, but it’s pretty significant. When we drop below 5,620, there’s not much support left in the S&P 500.
Interestingly, we saw a significant drop on September 18th going into the close, followed by a gap higher the next day. That gap at 5,620 has now been filled. As I mentioned, there isn’t much support in the S&P until around 5,400. Tomorrow, it will be crucial to see if the S&P 500 can snap back above 5,620. If it does, there could be an attempt to rally back to around 5,750. If not, we’re in a zone where a move toward 5,400 is possible. Beyond that, there’s another gap around 5,300, and then we’re looking at the August lows around 5,125.
If you’re bullish on the S&P, this is a critical level. Fundamentally, I wish I could say the S&P 500 is cheap, but it’s not. Many say valuation doesn’t matter, but that’s not true—valuation always matters; it’s just a question of when. Even after today’s pullback, the S&P 500 closed around 5,615. If we’re expected to earn $265 per share, that still puts the index at 21 times earnings, a historically high multiple. That’s about six or seven points above the median. From a fundamental perspective, there’s still room for the market to adjust before valuations make sense.
That also means we may not see value buyers stepping in to support the market. If we don’t get a rebound tomorrow, we could see further downside acceleration. I think a lot of this market movement is being driven by deleveraging, as I mentioned over the weekend.
Looking at the Japanese yen versus S&P 500 futures, this trend has played since early March—arguably even before that. The two have deviated only once since January 2023.
Today, we saw the spread between U.S. and Japanese 10-year yields break below a key support level at 2.80%, now trading around 2.66%. Tonight’s Japan session will be crucial, as the Japanese 10-year yield has climbed to 1.56%, breaking key levels. If the US10Y/JGB10Y spread continues to contract, the yen will keep strengthening.
Despite concerns about recession risk, today’s inflation swap data was interesting. One- and two-year inflation swaps actually rose. On Friday, the two-year swap traded at 2.78%; today, it’s fractionally higher. The one-year swap rose from 3.00% to just over 3.01%. This isn’t what you’d expect on a day when the S&P 500 dropped sharply.
Looking at inflation swaps for the coming months, February is pricing around 2.90%, May around 2.50%, but by October, expectations are back to 3.00%. This suggests the market isn’t pricing lower inflation, which typically indicates slower growth. Instead, it implies concerns about stagflation becoming more prominent.
We will just have to see how the next day or two goes. You can see more in today’s free YouTube Video.
Mike
Terms By CHATGPT
Macro & Fixed Income Terms:
•U.S.-Japan Yield Spread Breakdown – The narrowing difference between U.S. and Japanese government bond yields, which affects currency movements and investment flows.
•JGB Resistance Levels – Key price points where the Japanese 10-year government bond yield may struggle to rise further due to market forces.
•Inflation Swaps Term Structure – The pricing of inflation swaps over different time periods, reflecting market expectations for future inflation rates.
FX & Capital Flow Terms:
•US-Europe Rate Spreads & Capital Repatriation – The idea that differences in interest rates between the U.S. and Europe influence global capital movements, with investors shifting money based on yield opportunities.
•JPY Strength Impact on S&P Futures – The relationship between the Japanese yen and U.S. stock market futures, often driven by the unwinding of leveraged carry trades.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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