The mega tech earnings report with the exception of Tesla has been so far so good. The growth engine in Microsoft, Google, Meta and Amazon are intact despite the tight monetary conditions. But the stock market reaction to the good earnings report has been muted. The mood is sour. Any minor earnings miss has been severely punished. The entire stock market has been possessed by the longer term treasury bond market. The long end treasury yields have gone mad. The 10-year treasury yield touched 5% briefly.
The November Fed meeting rate decision will be released on Wednesday November 1. A few hours before the Fed interest-rate decision, the Treasury Department will announce its quarterly borrowing plan. This bond market event perhaps has more impact than the Fed’s interest-rate decision. The Fed has already prepped the market that a rate pause is in the chart. The recent aggressive government borrowing by selling longer term bonds have caused the longer term bond yield to go up dramatically which in term creates a tight financial condition that’s difficult for consumers and corporations. In the past, the Fed has been buying the longer term bonds so the consumers have enjoyed low mortgage rates and low interest rate car loans. The Fed sets the short term interest rates, the longer term treasury yields are determined by the market. The Fed was in the bond market buying longer term bonds when it was in quantitative easing mode. Now the Fed is not buying, the Chinese and Japanese are not buying either. That’s why the Treasury Department borrowing plan is import for the market to digest the trajectory of the longer term interest rates.
Technically, the market has rejected 5% 10-year treasury yield twice. If it can trade below 4.827% on Wednesday, then we should have a short term 10-year treasury yield top. This short term 10-year yield top should act as a catalyst for the year end stock market rally, if there is one. Apple will report earnings on Thursday. Hopefully Apple will not have bad numbers to crush the stock market.
In big picture, whatever the year end stock market rally we may have is the last cigarette puff. It is only reactive to a short term oversold condition and a short term longer term treasury yield top. We need to take advantage to get out and raise cash.
The eventual S&P 500 downside target could be its 200-week moving average at around 3940 before this cycle low is done. The S&P 500 200-week moving average has provided support for the past important cycle lows.
Seasonally speaking, the 10/23/2023 low was taken out last week, which means the October 2023 season low will be take out in the next seasonal low location, in February-March 2024.
A new bull market can’t start until the Fed changes its monetary policies. The Fed was forced to change policies due to high inflation. The Fed will be forced to change polices due to systemic risk in the financial markets even though inflation will not be at the Fed’s 2% target rate. We are counting on a financial credit event that will force the Fed to change. Other than a Fed pivot, nothing will move the market materially.
Below is the S&P 500 weekly chart. The S&P 500 is heading to test its 200-week moving average around 3940. It probably will take sometime to get there.