After yesterday’s heart-wrenching finish, the question is whether things can recover a bit before the weekend. It looks like the bleeding has slowed, but a lot depends on what happens in the bond market. All eyes remain on the 10-year Treasury yield, which rose as high as 1.6% yesterday after starting the year near 0.9%. The rapid rise fueled concerns about possible inflation and economic overheating. Also, the 10-year yield is now roughly equal to the S&P 500 dividend yield, meaning Treasuries could pose more competition to stocks. The yield ticked down a little to 1.47% early Friday, way below yesterday’s peak but still much higher than a week ago when it was under 1.3%. The slip in yields may weigh on the Financial sector today, but we’ll see if Tech can come back. The Nasdaq (COMP), which is heavily weighted toward Tech, dropped 3.5% yesterday. It’s Friday, which might feel like a relief after the week we’ve had but also could clarify where things stand on Wall Street. During the first wave of the pandemic, when fear stalked the markets, you often saw big drops on Friday because people were worried about holding onto long positions ahead of a two-day break. How this session develops, and how futures trading goes on Sunday night, might offer some clues about investor sentiment. Will people sell into the weekend, or will they feel confident jumping back in? Seeking Clues In VIX, PCE, Technical Support Levels It would be pretty impressive if we bounce back today, but that could depend on more than just yields. For instance, the Cboe Volatility Index (VIX) had a big day yesterday, finishing above 28. That was up about 34%, a pretty big move for one day. If it keeps rising and goes above 30, that might put people in a more cautious mood. The 30 level is key. VIX slipped just slightly early Friday but remains above the 28 level, well above where it started the week near 21. Another thing to monitor is whether either the COMP or the S&P 500 Index (SPX) can climb above some levels that got breached yesterday. Technically, some pretty important levels got taken out Thursday, with the COMP falling below its 50-day moving average and the SPX falling below its 20-day moving average. The 50-day of the SPX is near 3805, while a possible support level to watch for the COMP is 13,000. It’s tested that level several times recently. Then there’s inflation. One thing that’s clipped the market and raised Treasury yields lately is fear that the economy may be overheating. This morning’s Personal Consumption Expenditure (PCE) prices report for January showed a 0.3% rise in both core and headline PCE prices, neither of which is likely to strike fear in anyone’s hearts. Household income jumped 10% in January and personal spending grew 2.4%, more evidence of economic recovery but also something that may reinforce concerns about overheating. If you’re one of those who’s concerned, consider this: The SPX is down about 2% for the week, but remains just 3% away from all-time highs. Let’s keep things in perspective: Overall, the market hasn’t completely fallen out of bed. Stocks are still up more than 70% from the pandemic lows posted last March. While it may not be a good time to go “all in,” so to speak, there’s also no reason to panic. Over the last week, leading sectors are Energy, Financials, and Industrials, exactly the ones you’d expect to do well in an improving economy. It’s been a tough week for Tech, as you might already know, and Consumer Discretionary is another laggard. That’s mainly due to the plunge in Tesla Inc (NASDAQ: TSLA) shares. Whether the market can engineer a quick recovery and get back on its feet depends partly on the path of the 10-year yield, but also on whether last year’s leading stocks like Apple Inc (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), and TSLA can stop retreating. AAPL is down 17% from its highs, and TSLA is off 24% from its peak. Having said that, it’s not unhealthy to see some other sectors—especially Financials—show some life. Data Impressive So Far This Week Earlier this week, economic data looked more than OK. It looked pretty amazing. Durable goods and orders both came in way above expectations, and so did new home sales. Consumer confidence rose in February, and initial unemployment claims fell last week (though some of the decline may have reflected people not being able to file after the storm in Texas).= All this now arguably gets filed in the “good news is bad news” department, because it helps contribute to higher rates and more worry about overheating. Today’s expected stimulus vote in the House of Representatives is another possible touchpoint. Today is the last trading day of the month, which might be meaningful in some respects. It’s not like the end of a quarter in terms of so-called “position squaring,” but there is some significance and it could possibly mean a little buying interest after the market’s big dip. If there’s buying interest, we’ll see if it shows up in the battered and bruised Tech sector. Many stocks there got smoked yesterday, particularly semiconductors. The rising Treasury yield environment appears to be having a more substantial impact on Tech stocks, many of which trade at high valuations. Those valuations seemed reasonable to many analysts when yields were below 1%, but maybe not so great with yields at 1.5%. Remember, Tech got a big pushback in late 2018 when the 10-year yield climbed above 3%. Despite the yield worries, investors don’t appear to have much concern about a rate rise this year. Chances fell to just 2% in the Fed funds futures market by late Thursday, down from above 10% earlier this week. It looks like Fed Chairman Jerome Powell’s testimony to Congress this week, where he talked about the economy being a long way from normal, might have convinced investors the Fed doesn’t plan to act anytime soon. The question is whether they might take a smaller measure, like cutting back on bond purchases. Honestly, that doesn’t seem likely, either. CHART OF THE DAY: COPPERTOP? WHAT ABOUT TECH? A rally in technology shares—including the Nasdaq 100 Index (NDX—purple line) kicked into high gear last fall but seemed to lead the way down beginning in early February, just as interest rates started climbing. But copper futures (/HG—candlestick)—seen by many as a proxy for industrial production—took off to the upside, reaching levels not seen since the commodity boom in 2011. Yesterday, however, both took a hit. Data source: Nasdaq, CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. Sectors Bet on Inflation: The big story this week has been the 10-year Treasury yield climbing to new one-year highs above 1.5% from 0.9% at the start of 2021. This partly reflects hope for improved economic performance with a fiscal stimulus possibly ahead, but also reflects worries about inflation. So one question for investors is how to position themselves for these potential developments. Financials and Energy have been leaders, and both are typically sectors that benefit from inflation. That said, the Fed continues to sound unworried. “Inflation dynamics do change over time, but they don’t change on a dime,” Powell told Congress this week. “We don’t really see how a burst of fiscal support or spending that doesn’t last for many years would actually change those inflation dynamics.” If Powell’s right, maybe betting on inflation-driven sectors being helped long-term by the stimulus isn’t a slam dunk. Also, avoiding sectors like Utilities and Consumer Staples that traditionally perform poorly in an inflationary environment isn’t necessarily a “buy and hold” strategy either. Pieces of a Puzzle: There’s a reason stocks, bonds—and all asset classes really—don’t move in a straight line. News happens, and markets respond in real time, ebbing and flowing in constant search of equilibrium. That’s nothing new. But this market has been a challenge in that the pandemic ravaged the current economy, but the markets arguably began pricing in not only a post-pandemic economic surge, but also had to absorb several rounds of fiscal and monetary stimulus. Meanwhile, the Fed has offered a number of reassurances to the market that it would continue to put the pedal to the metal in terms of ultra-low interest rates, regardless of any potential inflationary headwinds. But what if the bond market develops its own ideas about the equilibrium level of interest rates? And what about segments of the stock market that may have priced in lower rates than the bond market? If Thursday’s selloff is a guide, that question is being asked these days. Not Jumping on Bandwagon: Bitcoin keeps flirting with $50,000, helped by corporations like Tesla Inc (NASDAQ: TSLA) beginning to embrace the cryptocurrency. So with that in mind, it was surprising to see a story that went a little under the radar earlier this week: Mastercard Inc (NYSE: MA) came out and said bitcoin won’t work for its plans because it’s too volatile. “Bitcoin doesn’t behave like a payment instrument,” Ann Cairns, executive vice chair at MA told the Future of Money conference, according to MarketWatch. “It’s too volatile and it takes too long to transact. So if you and I went for a cup of coffee, and you know, I decided to pay with bitcoin, our coffee might cost me, I don’t know, 40% more by the time it was served—and it takes 10 minutes to actually settle the transaction.” That’s a bit exaggerated, of course, and it doesn’t mean MA won’t allow cryptocurrencies into its network. It said it would a couple weeks ago. Just not bitcoin. As much as we hear about other companies jumping on the bitcoin bandwagon, it’s interesting to hear another side to the story. TD Ameritrade® commentary for educational purposes only. Member SIPC. Photo by Austin Distel on Unsplash See more from BenzingaClick here for options trades from BenzingaYield Sign Flashing: Spike In 10-Year Treasury Above 1.5% Spooks Market In Thursday SelloffNvidia Becomes Latest Company To Beat Earnings Estimates But Get Punished© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Today’s a big day for Fed watchers. So is tomorrow. Meanwhile, the “Tech check” continues with selling overnight hitting mega-cap stocks in that sector. We’ll talk more about Tech below. First, Fed Chairman Jerome Powell begins his semi-annual testimony to the Senate Committee on Banking, Housing, and Urban Affairs at 10 a.m. ET. He heads over to the House on Wednesday for more of the same, and it’s all going to be live-streamed. This is what people once called “Humphrey Hawkins” testimony because it was mandated by Senators Humphrey and Hawkins in 1978 (yep, that was Sen. Hubert Humphrey, who sadly died before the bill was signed into law). A lot of people are on pins and needles wondering what Powell might say about economic growth coming out of the pandemic and whether he’s worried about things getting overheated. The Atlanta Fed’s GDPNow forecasting model predicts an amazing 9.5% seasonally-adjusted gain in gross domestic product this quarter. That’s up from a prediction of 5% just a few weeks ago. Recent economic data like retail sales and industrial production could be driving some of these projections, though the GDPNow forecast is well above the Wall Street average. Powell Testimony Comes Amid Higher GDP Estimates Analysts generally expect 6% or better growth in Q2 and Q3, according to a Wall Street Journal forecasting survey. Even if that’s against pretty easy Q2 comparisons vs. a year ago, it’s high enough to maybe have some analysts scratching their heads and wondering if Powell and company might decide to do something about curbing possible inflation. Having said that, it’s kind of hard to believe Powell will start singing a different tune anytime soon, especially considering that as far as the Fed might be concerned, this growth is the logical outcome of nearly a year of zero rates and $120 billion a month in Fed bond purchases. Why would Powell want to kill the goose that laid a golden egg, so to speak? We know he’s expressed concern since last March about the slow pace of employment growth and the fact that many people haven’t gotten back on their feet yet. So one school of thought is that Powell likes what he’s seeing and has no intention of backing off. The other school of thought is that Powell could start hinting at holding something in reserve to keep inflation from getting out of hand. At this point, that’s like fighting a ghost, since inflation just isn’t really very evident yet. He’s said a bunch of times that the Fed will give investors plenty of time to adjust to any hints at a pullback in Fed support of the bond market, so the question is whether he might use today and tomorrow to make an early warning. Either way, Powell is usually very careful with his words and isn’t likely to go “off-script.” The CME FedWatch tool suggests about 85% chances of the Fed’s benchmark rate remaining at zero the rest of the year. Still, that’s a big change from all the talk we heard back a few weeks ago about no rate increase until 2022 or 2023. Other than the Powell testimony, the day features earnings from luxury home builder Toll Brothers Inc (NYSE: TOL) after the close. When TOL reported last time, its CEO said he was seeing “the strongest housing market” in his 30 years at the company thanks partly to low interest rates. TOL’s conference call might be a chance to see if this interest rate-sensitive sector is starting to feel any heat from rising yields. Yield Headwinds Keep Blasting Tech As long as yields keep pushing higher in the bond market, it could pose headwinds for the Tech sector. That particular part of the market was a mess on Monday, with FAANGs, Microsoft Corporation (NASDAQ: MSFT), Tesla Inc (NASDAQ: TSLA) and the semiconductors continuing to take a pounding. Growth stocks like these—which led things higher last year when so many investors were searching for safety in the familiar companies and the stay-at-home economy—just don’t tend to do as well in a rising yield environment. A lot of them have pretty big valuations based on hopes for powerful earnings growth, but high yields often act as a speed brake on earnings gains. There might be a little profit-taking going on, too. It doesn’t mean necessarily that people are going into higher-yield investments, only that they’re seeing other areas of the market they may want to go into after a great couple-year run. The chip sector, which recently defied the rest of Tech by continuing to rally, got taken out to the woodshed Monday. This included a 3% loss for NVIDIA Corporation (NASDAQ: NVDA), which is expected to report later this week. Remember, we’ve been here before. The Nasdaq 100 (NDX) is down four sessions in a row going into today, but it also had a rough September and October before picking up steam by the holidays. Tech sometimes has these kinds of stretches where things get out of whack, and in recent years they haven’t lasted too long. No one’s gotten rich fading Tech the last two years, but we’re at all-time highs and they’ve had an incredible run. You have to step back now and then. While rising yields are often bad news for Tech, they tend to help the Financials, Energy, Materials, and Industrial sectors because they point to possible renewed economic growth. All those sectors—as well as many “reopening” companies like airlines—did well Monday, and helped the Dow Jones Industrial Average ($DJI) even as the S&P 500 Index (SPX) fell for the fifth-straight session. Nasdaq (COMP), which so many Tech companies call home, suffered worse than 2% losses. Commodities, especially copper, continue to reflect hopes for the economy coming back. Lumber recently scored an all-time high. Walt Disney Co (NYSE: DIS), American Airlines Group Inc (NASDAQ: AAL), United Airlines Holdings Inc (NASDAQ: UAL), and Exxon Mobil Corporation (NYSE: XOM) got off to strong starts for the week. Big banks including Morgan Stanley (NYSE: MS) and Bank of America (NYSE: BAC) also racked up some gains. Crude flirted with $62 a barrel, and some analysts think $75 is possible as U.S. production looks like it might be slow to come back from the Texas storm. Analyst upgrades showed up in some of the “cyclical” stocks, too, which added some support. Meanwhile, Kohl’s Corporation (NYSE: KSS) shares hit a 15-month high after the company’s leaders rejected an activist investor group’s attempt to seize control, MarketWatch reported. Yesterday’s 6% rally could indicate investor confidence that this could light a fire, so to speak, under the company’s leadership to improve things. That being said, yesterday’s rally in KSS—which reports earnings next Tuesday—took shares into the mid $50s. A year ago KSS bottomed out below $11 and at one point was the subject of some bankruptcy speculation. CHART OF THE DAY: SPX TESTS KEY TRENDLINE. This three-month chart of the S&P 500 Index (SPX—candlestick) shows how it’s bounced off its 20-day moving average (blue line) again and again since late November. It closed Monday at 3876, just 10 points above the 20-day, so today’s an important session to see if that trendline can hold. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results. VIX in the Mix: The sort of sector shuffle we’re seeing often injects a bit of volatility. The Cboe Volatility Index (VIX) posted decent gains to start the week—jumping from 22 to above 26 at one point Tuesday morning—and there’s been no sign of any long-term move below the historical average of around 20. VIX hasn’t been below 20 for any length of time since the early days of the pandemic, and forecasting more volatility hasn’t been a bad call over the last year. However, it’s pretty amazing how quickly VIX dropped back into the low 20s following that crazy surge in January up to 37 when the short-squeeze frenzy got everyone frantic for a week or two. Still, though the index has had its gyrations, if you were to look at the VIX futures market (/VX) , you’d see traders are pricing a VIX of about 30 all the way out to October 2021. Thrown In the Deep End: For the first time, Airbnb Inc (NASDAQ: ABNB)—now in the ranks of public companies following its initial public offering (IPO)—is expected to report earnings this Thursday afternoon. As ABNB’s results may indicate, it was a great year to go public but not the best quarter for a travel-based company to release earnings for the first time. They’re projected to lose $9.01 a share, according to Wall Street consensus, on revenue of $740 million. That should be interesting in more than one way, first of all to see how the company handles its first time in the earnings spotlight, and also for any insight they may have on the tourism business. With ABNB and any travel-oriented company now, you’re basically betting on the future, because the present picture isn’t all that pretty. Last week, for instance, Marriott International Inc (NASDAQ: MAR) reported that Q4 systemwide revenue per available room, or revpar, dropped by 64.1% year over year. The good thing, if you’re an established firm like MAR, is that comparables get much easier starting as soon as Q1 when we lap the first wave of the pandemic. For a newer company like ABNB, there aren’t any public numbers from last year to compare against. Exchanging Punches: If you’re old enough, you might remember that joke about putting a humidifier and a dehumidifier in the same room to “fight it out.” In a way, that’s how the stock and bond markets look right now. Every time major indices rise, so do bond yields, making people nervous about possible pressure on future earnings and forcing stocks to retreat. Then every time they retreat, the “buy the dip” crowd emerges, trying to get in at lower prices and sending stocks up again. That could help explain why the S&P 500 Index (SPX) has been marching pretty much in place since early February, rising about 1% since Feb. 5. During that time, it’s stayed just above its 20-day moving average, which now sits near 3866, and generally has bounced off the 20-day on recent downturns since late November. The exception was in late January when it fell moderately below the 20-day four-straight sessions before mounting a rally to new highs. With that in mind, perhaps keep the 20-day moving average on your radar in the coming days and see if “buy the dip” saves the SPX from a more dramatic move lower. The SPX closed just 10 points above the 20-day MA on Monday. TD Ameritrade® commentary for educational purposes only. Member SIPC. Photo by Alexandre Debiève on Unsplash See more from BenzingaClick here for options trades from BenzingaHome Depot, Lowe's, Nvidia Among Highlights Of Another Key Earnings WeekHave Consumer Spending Habits Shifted Forever? Walmart CEO Thinks So© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.