January 18, 2024
Good morning,
In December, we talked about a battle between narratives that is developing early this year. That battle between the bond market investors, pricing in rate cuts at every Fed meeting this year beginning in March, and the Fed, who think the market’s easing schedule is too dramatic, began early this week. Two Fed speeches and a stronger than expected retail sales number have led to a correction in the bond market (yields higher). And, directly related to the backup in yields, stocks are correcting lower. The bond market’s correction has been modest so far. At the start of this week, a March rate cut was priced at 80% probability – it is 50% probability now. As mentioned last month, this battle would be waged over a period of weeks, probably right into the March 20th meeting.
Recall the correction in stocks that started this year off. It was shallow, brief, and tested index highs after it was over – a textbook first correction. That was an easy call at the time, every technical signal was bullish except for the very overbought sentiment. The technical picture is a bit different now for the equities correction that has begun with the bond market correction. Several short and intermediate term technical signals have flashed warning signs. Correction #2 should be deeper with a longer duration than the first. See S&P 500 Index chart below – the 50-day mav (green line) is the first support and is likely this correction’s first test (down only 4% from highs – it will feel worse).
Be well,
Mike
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