Weak bond auctions and rising yields send stocks tumbling as VIX spikes 27%

Stocks and bonds continue to decline as another weak treasury auction – the 3rd one this week – created more angst for investors, traders and of course the algo’s. Concerns over ‘funding the US deficit’ means that yields will have to rise – yesterday’s action left bond yields at their highest levels in over a month - putting the FED and the economy into a box. 

Treasury Secretary Janet Yellen brought a 3rd tranche of treasuries to the market yesterday…. $44 billion of 7 yr. notes – and that auction saw 7 yr. yields go from the pre-auction level of 4.637% to 4.65%.  Recall two things….One – is that we knew this last year, we knew that she was (and is) going to have to bring a lot of supply to the public markets to fund the ‘out of control’ spending and Two -  that on Tuesday she brought $139 billion worth of 2’s and 5’s, which were not ‘well received’ and all that did was drive yields across the curve higher….Well, yesterday’s weak auction only added additional upward pressure on yields.  The 2 yr. yield ended the day at 4.97%, the 5 yr. at 4.615%, the 7 yr. at 4.65% while the 10 yr. yield 4.61%.  The TLT (20 yr. bond ETF) fell by 1.25% and the TLH (10- 29 yr. bond ETF) lost 1%.  The AGG – which includes both treasuries and corporates fell by 0.3%. 

And all of this action in the bond market sent stocks lower….the Dow lost 412 pts or 1.1%, the S&P gave up 40 pts or 0.75%, the Nasdaq (which had surged up and thru 17k on Wednesday) lost 100 pts or 0.6%, the Russell lost 30 pts or 1.5%, the Transports gave up 213 pts or 1.4%, while the Equal Weight S&P lost 78 pts or 1.2%.  

The VIX – fear index – which was hovering at near record lows suggesting no fear – has suddenly lifted its head….recall I said that all you needed was just one catalyst to ignite the fire….After this week’s bond auctions failed to produce the demand they needed (the catalyst) – the VIX has spiked by 27%!  Going from a low of 11.52 on May 23rd to 14.60 this morning…. The VIXY ETF – (the way to play fear) has gained 7% during that same time period.  As you can imagine, all of the contra trades (SPXS, DOG, PSQ and SH) have also gained nicely over the past week and if tomorrow’s PCE report is not what they expect – then watch as the VIX moves even higher.

While rallying nicely all year – stocks have begun to falter just a bit as investors, traders and algos have to recalibrate their own views on what happens next while also trying to discern what the different FED members have to say, because they all have to say something a little different.  They all tease us about lower rates, but can’t commit, the economic data does not support a rate cut, but they are trying desperately to send the message that rate cuts are coming, yeah…so is Christmas! On Tuesday – we had Neely Kashkari (Minneapolis FED President) tell us that a rate HIKE is still possible, while last night -Atlanta’s Raffi Bostic tells a crowd that ‘many inflation measures are moving to the target range’….and that he would expect to see the year end as a time to ‘actually think about or be prepared to reduce rates’…..

Ok – do you see that?  Do you see how they orchestrate it?  They send one guy out (a non-voting member) to float the rate hike narrative idea and when the markets react negatively – they rush another one (a voting member) out to tell us – ‘It’s all good, we’re moving in the right direction, calm down, no need to get your panties in a bunch!’.  This because the last thing the Biden’s wanting to see is a stock market decline just ahead of the election…. recall that last week – when we pierced Dow 40k – JoJo came out and patted himself on the back for a job well done. (which is in itself ridiculous).  Well, the Dow now has a 38 handle on it and likely going lower.  In the last 2 days, the Dow has now breached both the short and intermediate term trendlines – which raises the temperature in the room a bit – as it suggests further weakness ahead….Now a look at the chart does say that if there is more downside pressure – then we could see the Dow test 37,600/38,000 – about another 2% from here…..but that level is not the long term trendline – the long term trendline is at 36,700 or another 4.5% from here. So, hold onto your hats….

Speaking of breakdowns – the Dow Transports has had a tough time of it…. down 7% ytd – having broken through all 3 trendlines – leaving it thrashing around trying to find support.  A look at that chart – tells us that if it fails to hold right here (April low) then we could see it test the October low of 13,480…. or another 9% from putting that index well into ‘correction mode’. 

The others – S&P and Nasdaq have yet to breach their short term trendlines, the Russell is in between short and intermediate trendlines while the Equal Weight S&P is sitting atop it’s intermediate term trendline.  So, it is an interesting moment in time…and is the exact reason why I tell you to A. Have a plan and B. no need to rush…. Patience is a virtue. While any pullback can be unnerving, it is also the time when you do not make emotional decisions, if you have a plan and you own a well-diversified portfolio of large and mega cap names across a range of industries, you should ride out this storm just fine.  Be patient with new money – something I have been saying all along…holding cash in an interest-bearing account is an investment decision….and buying stocks at a discount is another investment decision – so sit tight, just because I think we have a bit more on the downside.

Look – the market is trading at 22 x’s forward earnings ($240 x 22 = 5280) – a number that might make sense if you thought rates were coming down, but if rates are not coming down anytime soon – then 22 x’s is a very rich number – leaving investors to reprice the risk – and all that means is that we could see the market multiple drop to 20 or even 19?  And if that happens then we would see the S&P in a range of 4600/4800…Much closer to JPM’s year-end estimate of 4200 vs. BMO’s estimate of 5600.  Capisce?

Oil continues to trade around the $80 level…. rising about it on Tuesday only to trade below it on Wednesday…. all this as traders weigh the impact of tighter supply by OPEC+ and rising demand around the world.  Yesterday’s weakness being credited to the sell off in the bond market – which sent yields higher which can weigh on economic growth and if the economic growth slows – the demand will slow…. see how that works?  But in my mind – I do not see a slowing of demand….think AI, think bitcoin mining, think EV chargers, think about all the ways we use energy to make the world go round – not sure about you, but I do not see that plummeting at all….This isn’t covid when they shut the world down….I think we remain in the $78/$81 trading range.

Gold continued to churn and bounce off of trendline support at $2350 trading as high at $2380 yesterday as gold traders await the latest inflation data.  This morning Gold is down $10 – sitting once again atop the trendline at $2350. 

Economic data today includes – the second revision of 1st qtr. GDP and it is expected to be +1.3% - down from +1.5%, Core PCE Price Index of +3.7%, Wholesale Inventories of +0.1%, Retail Inventories m/m of +0.3% and Pending Home Sales m/m of -1% and y/y of – 2%.  While it is all important – it is really tomorrow’s PCE Deflator that everyone is waiting for. 

US futures are again under pressure…. Dow futures - 345, S&P’s -25, Nasdaq -85 and the Russell is –flat.  You know the drill, it is rising global bond yields, concerns over inflation and the next policy moves by the FED, the ECB, the BoE, the BoJ and even the PBoC. 

The S&P closed at 5266 – down 39 pts….  This morning – futures are down…. The market continues to feel a bit anxious and so I continue to look for a pullback –short term trendline support at 5,178 is less than 2% from here while the intermediate trendline support at 5,075 is 3.6% away. . Neither of which is an alarm bell by the way…. either move is well within the normal trading band.

Greek style baked chicken legs and thighs

Simple to make and easy to eat.

You need- the thighs and legs (skin on), olive oil, s&p, oregano, chicken broth and fresh lemon juice.

Wash the chicken and pat dry – then salt and set aside.

Preheat the oven to 350 degrees.

Next – in a blender – add the garlic and all the seasonings, broth and lemon juice.  Blend well. Now – pour over the chicken pieces and let it marinate for 20 mins.

Now cover tightly and place in the oven. Bake for 75 – 90 mins. Then uncover and turn on the broiler – allow the chicken to turn nice and golden brown. Remove and serve with a classic Greek salad.