Media Production

It was yet another volatile week of trading for markets. While the S&P 500 (SP500, SPX) meeting on Friday, he accepted the support of a news article from the Wall Street Journal and, more importantly, Japan intervened in the currency market to protect the yen vs the dollar to save the day.

Stocks were sitting much lower on Friday morning, with yields higher and the dollar screaming to its highest levels in years. Then around 9 AM, a news article from the Wall Street Journal suggested that the Fed might begin debating the pace of future rate hikes.

S&P 500 Futures

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At that point, S&P 500 futures were down almost 1% and there was a critical level of support. If that support had been broken, S&P 500 futures would likely have been pushed down to around 3,600. But then, at 8:52 AM, everything came crashing back on the WSJ headline.

Beyond the headline, the article didn’t mention anything new, even noting comments made by Fed officials nearly a month ago. Anyone who has listened to Fed officials over the past month should not be surprised.

In addition, big news came at 10:30 AM when Japan intervened to strengthen the yen against the dollar, causing the dollar-yen pair to trade sharply from around 152 to 146. ignited a risk rally in stocks. The expiration date of the monthly options led to a sharp decline in put values ​​along with the new trend of traders buying out-of-the-money call options with zero days to maturity, and we experienced a strong rally.

yen

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Higher Bond Production Race

It’s clear that bond yields have risen sharply since the CPI report, and the bond market has significantly retraced the Fed’s terminal rates, and more importantly, the time it takes to reach that peak. out, stocks did not reprice in the same way. For example, since October 12, the 10-year rate has risen from 3.89% to 4.22%. Meanwhile, the S&P 500 has increased from about 3,575 to 3,754, and the dividend yield for the S&P 500 fallen from 1.84% to 1.74%.

S&P 500 vs.  10-Yr

Bloomberg

That pushed the spread between the 10-Year yield and the S&P 500 dividend yield to 2.45%. That’s the highest level since 2010, and more importantly, it appears to be at a tipping point. foldable Historically, when the spread has reached this point, it has acted as either support or resistance. Is it possible that the market is resetting to some higher spreads, as bonds and stocks return to pre-financial crisis levels? Definitely. But like any technical formation or technical pattern, when the market hits resistance, it pauses or reverses for a while while it decides what it wants to do.

Dividend yield - 10 year rate

Bloomberg

Draining

Furthermore, no additional liquidity entered the market. Last week, liquidity was expelled from the market, and reserve balances fell by about $50 billion to $3.05 trillion as the use of the reverse repurchase facility increased. Reserve balances are a strong indicator of where the S&P 500 has gone, and balances typically lead the index by 5 to 15 days. Later, the decline would suggest that the stock rally does not last on Friday.

Reserve Balances

Bloomberg

A stronger dollar

In addition, there are signs that the dollar index can climb from here, with the ability to form a continuous bullish triangle. The dollar index has been consolidating around the 110 to 114 region since late September. Additionally, the RSI is steadily rising, suggesting that the next significant move in the dollar could be higher.

If the dollar breaks down and pushes lower, that would be a risk signal that would suggest the equity could go higher. If the dollar index breaks out as the chart shows and goes higher, that would be negative for stocks, with a sharp decline to follow.

Dollar

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Strong Technical Resistance

Furthermore, despite rising on Friday, the S&P 500 could not overcome significant resistance. The 3,750 region is necessary because that was around the July lows, and we have seen the previous lows as effective resistance to rally attempts in the past. For example, in early June, we saw the 4,165 level act as a significant resistance level equal to the March low.

If the S&P 500 can close above the highs seen on October 4, another run higher to 3,900 and possibly as high as a gap at 4,108 is possible. However, if you fail to push beyond or close above 3,800, it is likely to decline, if not back to the lows, but through them.

Stock

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At least so far, there’s not enough to suggest that the equity market rally from last week is the real thing, and there hasn’t been enough of a repress in stocks to reflect the recent move in higher rates.

Next week will be crucial.



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