The 10-year treasury yield formed a top last week by trading below 4.827% when the US Treasury Department announced a better than expected next quarter borrowing plan. The subsequent Fed meeting was dovish. To top if off, the less than expected jobs data further crashed the 10-year treasury yield. It’s weird that the stock market cheered a weaker jobs data. It’s a twisted psychology, but it is how the stock market works.
The weaker jobs data will allow the Fed not to raise rates further, which is the relief that everyone has been looking for from the Fed. But at the end of the day, fundamentally nobody wants a weaker jobs data because bad news is bad. It is just not bad enough to crash everything yet. So with this understanding, the current stock market rally is purely for the purpose of trading. It’s short covering. The sentiment was super negative prior to the bond market development.
The most oversold small cap stocks bounced more than the S&P 500. Are the small cap stocks going to start a new bull market to outperform the mega tech stocks? Definitely not! This is another lie caused by the short covering rally. None of the fundamental reasons that caused the small cap stocks to enter a bear market since November 2021 have changed. The only way for the small cap stocks to start a new bull market is to have an easier Fed. A tight Fed has been and is choking the small cap stocks and hyper growth stocks. Small cap stocks need money to live and grow. The mega tech companies have so much cash on their balance sheets. The high interest rates actually help them earn more interest income.
Historically, a recession starts two years after the first Fed rate hike. The first Fed rate hike started in March 2022 in this cycle. So we can expect a recession to start in Q1 2024. Q1 2024 is a logical place for the current 4-year cycle to finish. The stock market can make a bottom when the economy is entering a recession because of the forward looking discount mechanism. The small cap stocks topped in November 2021. In other words, the small cap stocks have been looking for a recession since November 2021.
Technically, the 10-year treasury yield monthly cycle has turned down. We can expect the 10-year treasury yield to continue to fall or trade sideways for the next 6-9 months.
The stock market entered a new weekly cycle. The prior weekly cycle bottomed on the week of 10/27/23 week. Now it is one week into the current weekly cycle. S&P 500 4600 level is the resistance zone. If the S&P 500 is able to take out 4600 before year end, or in Q1 2024, it will be a big bull trap. This bull trap is working very hard NOW by making the small cap stocks outperforming the safety mega tech stocks. The small cap stocks are creating a false narrative.
It is not okay yet for the stock market to enter a new bull market now. Please try to raise cash during this rally. There will be a better time to put money to use.
Below is the S&P 500 cash index weekly chart. The white trend line is the resistance line. Right now we see 4600 is the solid resistance area.