Stocks Drop On August 2 As Fed Ramps Up Hawkish Rhetoric

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8/2/22

STOCKS – AMD

MACRO – SPY, TIP, RATES, QQQ

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Stocks had another volatile session, with the S&P 500 trading around the flat line most of the day but turning lower by 70 bps at the close. At this point, the index seems to be consolidating sideways, despite some solid sell attempts. CTA and Vol Control funds appear to be overwhelming the market and helping “hold things up.” Once these guys disappear, the rally will fizzle; at this point, more sellers will need to emerge to change this trend. When the seller’s return will largely depend on how much rates can rise, how strong the dollar can get, and ultimately how tight financial conditions become.

It still looks like the index can get up to around 4,175 to 4,200 before ultimately stalling out. Especially now that we are starting to see, rates move back up after some hawkish commentary from Fed governors Daly, Evans, Mester, and Bullard. The general tone was that rates need to go higher and will probably need to stay there for some time until they see a clear move lower in inflation.

We may be in a throw-over of a rising wedge, but to confirm that, we wold need to fall below the lower trend line of the pattern, or the second black line.

The hawkish comments helped to push Fed Fund futures rates higher. The December 2023 contracts rose by around 20 bps today to almost 3%. This helped push the 2-Yr yield higher by around 20 bps, up 3.08%, while the 10-yr rate rose by 17 bps to 2.75%.

The big thing to watch with the 10-yr rate is whether or not this move higher in rates has followed through. If it does follow through, the recent move down in the 10-Yr was a false breakdown within a Head-And-Shoulders pattern. When these Head-And-Shoulder patterns fail to break lower, they tend to continue the previous trend, which would mean the 10-Year has much further to climb back to 3% and potentially higher.

The big move in rates is also pushing real yields higher, sending the TIP ETF lower. At least for today, the move down in the TIP ETF didn’t have a big impact on the QQQ, but if the trend continues, I suspect that the QQQ will be forced lower.

AMD is trading sharply lower after hours following guidance that failed to meet estimates. AMD is a stock that has a massive move higher in recent days, and the RSI is very overbought, so a pullback should not come as a surprise with the potential for the shares to revert to $85.

That’s going to be all for today.

-Mike

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