Most Explanations For Thursday’s Bizarro Market Are Stocks-Negative

Thursday’s action in markets was totally crazy. We had astoundingly great economic numbers in the morning (drop in jobless claims, surge in retail sales, surge in manufacturing), yet nobody bought economically-sensitive energy, financial or reopening plays (apart from retail stocks), and bond bulls somehow used the event to storm back onto the scene and drive the 10-year yield to the lowest in a month. Then the 30-year bond gave back almost all its gains in the last few hours. 

Of course one explanation some jumped to is that the bond market had some grand Come-to-Jerome moment and finally expressed confidence in Powell’s promise not to hike rates. There is no evidence of that whatsoever. Frankly, it’s probably closer to the opposite, as Brian Chappatta suggests tapering fears could be playing a role thru worries about policy slowing the economy and creating a demand for bonds. If cyclical and reopening stocks were rallying but bond yields were down, that would indicate some new embrace of Fed policy. We also didn’t get a commensurate drop in the dollar, which is what we’d expect given recent ties between lower rates and the dollar around Fed speak. We didn’t get any of that. The dollar actually looks like its 10-day decline is trying to stabilize.

So what did we get? When in doubt, the simplest solution is to avoid complex narratives and just describe the movement with technical terms. From that perspective, the bond certainly showed uncharacteristic strength compared to recent trends, but likely still best described as consolidating within the short-term trend or possibly beginning a reversal toward either the 50-day moving average or maybe even the trendline off the August lows:

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If we are just undoing the rapid rise in yields through consolidation, it means we are unlikely to keep up the pace of Thursday’s move, and more likely to see some kind of reversion trade. That would of course fit much better with what one would think are the fundamentals for higher yields: fantastic economic data, reopening just getting underway, and vaccinations around the world picking up. If we reconnect with this backdrop, it would suggest the value rotation that’s been accelerating this year can resume. That would be bearish tech stocks.

Another possibility is that the bond move reflects a market that has already understood and priced in a tremendous amount of economic strength; a sort of epic “sell the news event” in which bonds rallied after the market failed to sell off further following the great data. That would explain cyclical stocks doing poorly as bonds rallied. But there’s a pretty big catch there for tech: the whole narrative people have been giving for tech’s recent strength is that big tech is cyclical too! And it’s true, the high-quality megacap tech stocks whose products will enjoy a booming economy (think advertising through Facebook and Google
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) have had a great month.

So it doesn’t really make sense at this point to think tech should run too far if the bond market is telling us economic growth is fully priced in.

So far we have three possibilities: A) the market is expressing a new comfort with Fed policy — I believe this to be very unlikely. B) this is a technical consolidation/headfake before higher yields and value reasserts its dominance over growth — I think the fundamentals support this. Or C) bonds are telling us the recovery is fully priced in. I find this hard to believe given how shocking the data has been, but it’s certainly possible. And bearish all equities.

There’s one other possibility. This one’s a bit nebulous, but D) it’s possible that bonds have been firming the past few weeks and now rallying because the incredible risk-on rally that’s been going on for over a year is running out of steam and someone’s buying bonds in fear of a pullback. I don’t think this is unreasonable, at all. A main point in my coverage has been that since yields began rising, there have been signs of froth shifting, and possibly rolling over. The Nasdaq’s
NDAQ
trailing P/E is right where it was when yields bottomed last August. That speculative energy shifted into reopening stocks this year, but if they can’t rally on data like we got today, they look exhausted. Instead, investors went for high-quality tech trades that some consider defensive. At the same time, defensive utilities and staples also woke up. Today it was health care (also considered defensive) that broke out. It looks like musical chairs. Are bonds telling us the music is ending?

There’s also no direct-liquidity stimulus coming from the White House anymore and we know the writing’s on the wall for eventual tapering. The second stimmy-check bounce never came for ARKK and many trader favorites. Lots of companies are above their moving averages, but few are at new highs.

And finally, my preferred gauge of speculative activity, bitcoin, is doing something very unusual: it’s making highs on slowing momentum. It’s the first time it’s happened since futures launch, and suggests its growing weary.

Of the four explanations for today’s bond move I’ve laid out, only A) is positive for the Nasdaq and stocks overall, but I think it’s quite unlikely. B) is positive for more value rotation, and C and D are negative for stocks as a whole. If I had to ballpark the odds:

A) 15% B) 35% C) 25% D) 25%