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Like Icarus, the stock market may be flying too close to the sun these days.
The mood seems euphoric, with many headlines calling for further gains and analysts’ price targets reaching absurd levels. However, as the mood continues to escalate, it seems that the wax is starting to melt, with interest rates rising, the dollar strengthening, and global markets faltering.
10-year rates today climbed another ten bps to finish above 4.4%, a day before the October CPI. The equity market seems to disregard the CPI report, as noted by the low VIX 1-day reading of around 10. However, given the positioning of the 10-year Treasury, tomorrow’s CPI and the inflation reports to follow later in the week may be much more significant than they appear.
At this point, the 10-year rate is now trading around 4.43% and could rise much higher, especially if the combination of inflation data and retail sales is hotter than expected. Certainly, given the positioning heading into these reports, the rest of the week could suggest that an even bigger move in rates is coming.
The same could be said of the USD/CAD, which has been at its weakest level since October 2022. The current position appears to be critical.
Gold seems to be positioned similarly.
It seems also to be the same for the HYG.
Additionally, there have been significant signs of weakness across both developed and emerging markets. The German DAX has seen a notable downturn over the past couple of weeks and could arguably be forming a head-and-shoulders pattern.
At this point, the signals from other parts of the market certainly aren’t looking great, and the question becomes how much longer it will be until the US markets start to succumb to rising rates and the stronger dollar. The NASDAQ 100 has hit the upper end of the rising wedge pattern that has been in place since August. Based on this chart, this pattern has no more rising wedges. There was a smaller wedge at one point, but that clearly failed to hold; now, the (blue) wedge is the only one left.
In the meantime, the 1-month implied correlation fell below 10 today, which is historically at a very low level and tends to be around the lower end of the range. Typically, when the 1-month implied correlation bottoms out, the stock market tops.
Keep an eye on the Biotech XBI ETF. It has been consolidating in a triangle pattern, and it had appeared to break out, but now it has come back down and into the triangle, which could be part of a throw-over pattern. If it is a throw-over, then we need to watch for a potential break lower. The Biotechs tend to be a good proxy for where rates are heading, and so if rates go higher from here, biotechs likely do poorly.
-Mike
Charts used with the permission of Bloomberg Finance L.P. 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.Â
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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.