The market made some progress last week as it bounced and held on to gains following a Congressional agreement to extend the debt ceiling issue until December. It was a good start to a potential platform for better market action as third-quarter earnings hit, but bonds continue to weaken as interest rates jump and concerns about oil and energy prices continue to build.
The higher interest rates have been particularly problematic for high-growth technology stocks and FATMAAN names. These stocks are more sensitive to rates because they are mostly valued on earnings far into the future. When rates go up, this impacts the discount rate and causes valuations to drop.
While rates are playing havoc with growth stocks, there is other rotational action going on. Banks are benefiting from the movement as the yield curve is steepening. This makes banks more profitable as they tend to borrow money short-term and lend it long-term. Also, energy prices continue to surge, which is adding to inflationary pressures and is causing some concerns that it will lead to stagnation which is slow growth during an inflationary period.
Earnings season starts this week as JP Morgan Chase (JPM) reports on Wednesday morning and Bank of America (BAC) , Citigroup (C) , Morgan Stanley (MS) , and several others report after the close.
Technology names start to report a week or so later, but it will be interesting to see the reaction to financials as higher rates are currently working in their favor, and sentiment in that sector is leading the market along with energy.
While technical conditions for the overall market and many stocks did advance last week, there is work to be done. Charts are not compelling, but they are developing and have the potential to create some good setups as we head into reports in a week or two.
It is important to note that there is still a major disconnect between the indices and many big-caps on one hand and growth stocks and small-caps on the other hand. The gulf between the two has been narrowing, but many of the secondary stocks have already corrected to a much greater degree than the indices and are in better shape for some upside action on good earnings news. Expectations are low, and many stocks are bouncing around on some significant support levels.
Cryptocurrencies continue to act well, and there is some continuation in the recovery of big-cap China names, but Apple (AAPL) and the FATMAAN names are struggling.
