Monday felt strong enough, sort of. For most of the day anyway.
It all started with strength in Treasury security markets. The U.S. 10-Year Note went from paying as much 1.76% last Thursday to the yields above 1.72% late Friday night. Buyers kept on coming. The 10-Year paid less than 1.7% for most of Monday, and now as the man in the blackened window points out at zero dark-thirty on Tuesday morning, U.S. 10-Year paper gives up little more than 1.65%.
The reaction across equity markets was just what many were looking for on Monday. The Nasdaq Composite easily led the "big three," as the Nasdaq 100 ( (QQQ) ETF) easily led all major large-cap equity indices. Using Sector Select SPDR ETFs as proxies, Technology ( (XLK) ) easily won the day, with strength well spread across both semiconductors and software-type names. That's where things get if not weird, at least different.
There are 11 S&P sectors, seven of which ended Monday in the green. After ceding first place to Tech, places two through four all went to defensive-type sectors, while five of the six worst-performing sectors for the day were all cyclical types, including the bottom two rungs on the ladder: Energy ( (XLE) ) and Financials ( (XLF) ).
The chart here illustrates the yield spread between U.S. 3-month paper and the U.S. 10-Year. Collapsing short-term/long-term yield spreads explains poor performance across the financials. OK, we get that.
Digging Deeper
The financial media had largely explained the strength in equity markets throughout the day as a byproduct of a news story circulated by The New York Times that President Biden's advisors were indeed close to presenting to the president an infrastructure investment plan with a minimum price tag of $3 trillion. That backstory may have been a driver, but as that might be (responsible or not) a driver for growth/inflation (transitory or not), that would not explain the fact that markets sold off hard late in the day, nor does it explain strength in Treasury markets, weakness in cyclicals, a down day for the Transports, and a disproportionately poor day for small to mid-cap stocks. Now, does it? We have to think beyond the obvious, which is a lost art in 2021.
Breadth was negative at both of New York's primary equity exchanges, and don't bother looking at trading volumes. Volume is always light the Monday after a Friday "Quadruple Witching" expiration" event. Now, I ask you to think with me. We'll be like a couple of ancient Greek philosophers. A series of news events had forced some algorithmic buying of medium-to long-term sovereign debt. We'll start with the state of New Jersey pausing reopening plans due to rising cases of new infections of COVID. This was quickly followed by expectations that New York City will not follow through on a planned increase in restaurant capacity for the same reason. These impacts hit markets late on Monday. European equity markets and U.S. equity index futures struggled overnight as Germany extended its existing social and economic lockdown into mid-April, while imposing new restrictions meant to restrict family activities around the Easter holiday.
In addition, late on Monday, and this one blows my mind, in the U.S., the Data and Safety Monitoring Board notified the NIAID (National Institute of Allergy and Infectious Diseases), BARDA (Biomedical Advanced Research and Development Authority), and AstraZeneca (AZN) itself that "it was concerned by information released by AstraZeneca on initial data from its COVID-19 vaccine clinical trial." This concern is apparently that AstraZeneca may have included outdated information from that trial, and that this may have resulted in an incomplete view of the data on efficacy. In short, "Oh boy."
Amphibious
Let's identify what is impacting our marketplace.
We have rising new infections impacting socio-economic reopening plans both in parts of North America and Europe. We suddenly have more questions than answers in regards to what just a day ago, appeared to be very positive data for what has been one of Europe' primary COVID vaccines and would have potentially added a fourth weapon to the U.S. arsenal. This puts upward pressure on medium to long-term U.S. Treasury securities as well as the U.S. dollar, which in turn places downward pressure on yield spreads. Bad for banks. Good for mega-cap high tech, good for tech in general, and good for the large-cap Nasdaq equity indices that had been left behind in late February.
Now, consider the pension fund quarterly/monthly rebalancing act that we discussed on Monday morning. As the yield curve bends in this way, and capital moves out of cyclicals and back into growth, which had already become a minor trend, this rebalancing act becomes less impactful. Over the weekend, most estimates had somewhere between $25 billion and $30 billion just from pension funds alone, moving into debt securities. As bond traders try to front run that move, as some funds are permitted to move early, and as new caseloads of infection impact the landscape, this market impact, which will still be meaningful could potentially become far less so.
Let's take a look at the Nasdaq Composite, shall we?
Now, several folks I read, most notably Helene Meisler right here at Real Money have been pointing toward the potential for the Nasdaq Composite to complete an "Inverse Head & Shoulders" pattern, which by the way, would be considered quite bullish. As you can easily see, the pattern is not yet complete. The "neckline" of this pattern would become the pivot. That's up around the 13,600 area, so a little ways still to go.
I also want to point out that the Nasdaq Composite successfully took and held the 21-day exponential moving average on Monday, but quite visibly failed at the 50-day simple moving average, which is far more important. Why so? The 21-day EMA provokes swing traders, the 50-day SMA provokes portfolio managers. The one line impacts a great deal more capital flow than the other. Simple.
In summary, we're not there yet, but I think this makes it easier to see the unfolding potential for at least a temporary return to pandemic trends, that could last into April at a minimum.
Beware that I am not always correct and my view appears right now to be an outlier, but make no mistake, the environment is evolving right before your eyes. Stay ready for every eventuality.
They call it a "barbell" now. We simply called it being "well diversified" before people started believing that they had invented everything. Just be ready to adapt. Arthur Cashin would tell you to "stay nimble." In my own language: be "amphibious."
He Said What?
Fed Chair Jerome Powell and Treasury Secretary Janet Yellen will testify before the House Financial Services Committee Tuesday and the Senate Banking Committee Wednesday. I feel for the two of them, I really do, For I, too, at times in my career, have at times had to very politely suffer the arrogance of fools. Yes, I point at both sides of our famous "aisle."
The Fed Chair also spoke on Monday. Powell said "the recovery has progressed more quickly than generally expected and looks to be strengthening," before adding... "But the recovery is far from complete." Uhm, gotcha... you kind of told us last week, we get it. Then, Powell went off course a little and entered less-focused-upon territory.
No safety or surprise
The end
I'll never look into your eyes
Again
-- Densmore, Manzarek. Krieger, Morrison (The Doors) 1967
Question? The End of what? Of bitcoin? Of crypto-currency?
"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
-- Winston Churchill 1942
Powell went on to allude to the fact that the Federal Reserve Bank has been actively exploring the launch of a "crypto" U.S. dollar, or a perhaps a "FedCoin" (Not his words). In Powell's words, independent cryptos are "more of an asset for speculation, so they're also not particularly in use as a means of payment (In economics, we refer to this as a medium of exchange). It's more a speculative asset that's essentially a substitute for gold, rather than for the dollar."
How do I take that? Powell does not see gold as money. I disagree. Powell does not see bitcoin as money. I agree. Powell certainly sees fiat as money. I agree because it has been proven useful as a medium of exchange, it is divisible, and has been used as a store of value, although that last purpose might easily become somewhat fragile and has been fragile in the past.
As far as adopting a fully digital version of the U.S. dollar, Powell says he needs "buy-ins" from both the administration, the legislature, and the public. Powell does not feel that current law permits the Fed to go that far.
My take?
As fiscal policy only gets further and further out into the weeds, the federal government will have to look under every rock to find taxable transactions/revenues. The most efficient way to do this, not that I am in favor of it, would be to stamp out the cash economy. No off-the-books transactions, no money laundering. No underground economy at all. That not only includes cash, but cryptocurrencies as well. The only buy in they really need is from the other reserve currency central banks.
Ever think you would see the day when all "cash" was digital so the federal government could place a negative interest rate (tax) on savings? I can see this coming from a mile away, and that lock box of cash under your bed will be worthless.
One Last Thing
I know I ran long this morning. I can even see some light in the east. Check out this chart of Best Buy (BBY) . Saw this last night with my right eye while my left eye was watching hockey.
The stock appears to be completing a "double bottom," which would be bullish. Just beware that this could be a Trojan Horse. The pivot would be just around the $123 level, which also happens to be an area of resistance now headed for its fifth test since October. Even though it would cost a few dollars more, I would rather by this name on momentum above pivot than this close to probable resistance. Just food for thought.
Economics (All Times Eastern)
08:55 - Redbook (Weekly): Last 8.5% y/y.
10:00 - New Home Sales (Feb): Expecting 877K, Last 923K.
10:00 - U of M Consumer Sentiment (March-F): Flashed 102.0.
10:00 - Richmond Fed Manufacturing Index (Mar): Expecting 15, Last 14.
16:30 - API Oil Inventories (Weekly): Last -1M.
The Federal Reserve & US Treasury (All Times Eastern)
10:30 - Speaker: Atlanta Fed Pres. Raphael Bostic.
11:00 - Speaker: Richmond Fed Pres. Tom Barkin.
12:00 - Speaker: Federal Reserve Chair Jerome Powell.
12:00 - Speaker: Treasury Secretary Janet Yellen.
13:23 - Speaker: Reserve Board Gov. Lael Brainard.
14:45 - Speaker: New York Fed Pres. John Williams.
15:45 - Speaker: Reserve Board Gov. Lael Brainard.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (INFO) (0.71)
