Stocks Drop On August 31, As Real Yields Explode Higher

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8/31/22

STOCKS – TER, SMH, NVDA

MACRO – SPY, IEF, LQD, TIP

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Stocks finished the day lower again, with the S&P 500 dropping 78 bps to 3,954. But the big moves that drove that end-of-day sell-off appears to have come from a more than $4 billion sell imbalance from yields and real yields jumping. Not sure the move in yields was due to month-end rebalancing, but the 5-Yr TIP rate rose to around 75 bps, a new cycle high.

TIP (TIP)

This sent the TIP ETF sharply lower on the day, dropping by a massive 90 bps and closing right on support at $113.90. If that level of support breaks, then I think the TIP ETF will be heading to new lows, and if the TIP ETF starts making new lows, I think the odds of the QQQ making new lows increases dramatically.

NASDAQ (QQQ)

As I have explained for months, where the TIP ETF goes, the QQQ will follow. The TIP ETF represents real yields, and if falling real yields helped to give the QQQ that inflated and overvalued price, then rising real yields will take it all away, and when the TIP ETF drops, it is an indication that real yields are rising, which is terrible for the QQQ and stocks in general.

S&P 500 (SPX)

The S&P 500 closed right on support today, around 3,954, and is very close to entering the zone that is so critical. It is starting to look like the index wants to at least fill that gap to 3,920.

Financial Conditions (IEF/LQD)

The reason I say that is because real yields are rising, and financial conditions are tightening. The IEF/LQD ratio was higher today. If that continues to increase, it is likely to be another sign that stocks have further to fall.

Semis (SMH)

You can also see that the Semi ETF (SMH) finished just below support at $214.50 and, perhaps more importantly, has failed to sustain the breakout from the declining channel. It is possible, that the ETF will fall below $200.

Teradyne (TER)

Teradyne currently looks very weak and close to breaking support around $83. Once that level breaks, there is very little support to keep the stock from falling to around $74 and its pre-covid highs.

Nvidia (NVDA)

Well, Nvidia is trading around $150 and just one bad day away from making a new low, and given those horrible results, it probably should be making a new low.

Have a good one.

-Mike

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