After a higher-than-anticipated CPI report, the major market averages traded much lower. August's CPI came in increased by 20 basis points.
Fed Futures are now pricing in a 20% chance of a 100-basis point hike and an 80% chance of a 75-basis point hike. Inflation has broadened in society and become more entrenched in the economy, and will remain above 2% for some time.
It can be challenging to keep up with today's stock market. However, one reliable tool, MarketGauge's "Modern Family" provides insight into the current macro picture. One of the family members and the strongest now, "Transports" (IYT), helps provide the general assessment of the bond market. Furthermore, junk bonds have been excellent at assessing risk on or off.
It's important to look at where we are in terms of risk. Are we able to see further gains in the stock market, or is a pullback on the horizon? To answer this question, we need to look at bonds and yields as well.
The chart above shows that junk bonds (JNK) are losing steam and retreating from its 50-day moving average. JNK is rolling over, yields are around 7% and investors are buying less risky debt. Investors are not choosing higher spreads, but less risky bonds.
At this moment, one can take virtually no risk and receive 3.73% in 24 months and only lose inflation cost.
IYT failed the 200-DMA and, until the close, was holding the 50-DMA. Should we confirm the return of the bear phase, we can assume, at this point, that the economy cannot handle these aggressive rate hikes.
What is interesting and, perhaps the best scenario besides JNK bonds holding June lows, is that IYT is outperforming the SPY. Should JNK hold and IYT reclaim their 50-DMAs, perhaps the worst of the shock is behind us. Nevertheless, should neither hold up and sell off further, we will take that as a reliable sell signal.
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Mish joins Business First AM to examine the question "will the market go off-track?"
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- S&P 500 (SPY): Unconfirmed return to bear phase 389 1st support with additional support at 382 and resistance at 400
- Russell 2000 (IWM): Unconfirmed return to bear phase; 178 support, 186.50 resistance.
- Dow (DIA): Unconfirmed return to bear phase; 310.90 support (last week low), 315 resistance.
- Nasdaq (QQQ): Unconfirmed return to bear phase; 292 support, 300 resistance.
- KRE (Regional Banks): Unconfirmed return to bear phase; 62 support, 63.25 resistance.
- SMH (Semiconductors): 198 support, 210 resistance.
- IYT (Transportation): Unconfirmed return to bear phase; 226.80 support, 233.50 resistance.
- IBB (Biotechnology): Unconfirmed return to bear phase; 120.50 support, 124.10 resistance.
- XRT (Retail): Unconfirmed return to bear phase; 61.70 support, 64.50 resistance.
Director of Trading Research and Education