In December 17-18 2023 Fed meeting, Fed Chair Powell talked about rate cuts in 2024 that added fuel to the fire for the Christmas rally in bonds and stocks.  Both bond traders and equity traders immediately priced in aggressive rate cuts starting as early as in March 2024.  In January 30-31 Fed meeting, Fed Chair Powell emphasized no rate cut in March and definitely wanting to wait for inflation data to confirmed the trend.  The stock market kept fighting the Fed and pressed hard on the rally in February.  Some even talked about rate cuts don’t matter and the stock market rally can go on without worry.  The Q4 2023 earnings were too good to ignore.  The S&P 500 closed above 5000 last week.  5000 round number is not a technical number, but a psychological resistance.

Will the stock market continue to press on without worries?  Bond traders definitely caved to the Fed and dialed back their rate-cut bets.  The 10-year treasury yield bottomed on 12/27/2023, and retested the bottom on 02/01/2024.  Now the 10-year treasury yield is positioned to rally out of the double bottom formation and perhaps it can get up to 4.5%, that is a far cry from the December 2023 bottom at 3.817%!  The recent series of inflation data has shown persistent decreasing inflation, why would interest rates go up?  The rates should go down with decreasing inflation!  Because the Fed will not lower rates, plain and simple.  The economy is too strong for the Fed to lower rates at the moment.  The economy can afford the higher rates at the moment.

Eventually equity traders will follow bond traders and stop fighting the Fed!  At the moment, there is nothing in the charts showing that a stock market top is in the making.  No signs of weakness of any kind is presenting in the S&P 500 charts now.  The S&P 500 could reach 5110 by next week.

Seasonally, a mid February top could lead to a low in February – March.  Nvidia reports earnings on February 21.  Nvidia has been rallying into earnings in the last few quarters.  Nvidia has sold off each time after earnings.  It seems to have the same setup this time.  The stock market will not go down unless Nvidia stock goes down.  So the entire stock market is waiting for Nvidia earnings report.  The bond market has geared up for a correction (yields go up).

We might have to wait for one more week for a S&P 500 pullback.  The DOW made a top on 02/02/2024 and it hasn’t been able to make new highs with the S&P 500 in the last 5 trading days.

Don’t chase the market at this level.  If you must do something, you could start to sell covered call options against the S&P 500 at 5110 level.  We have sold covered calls against the NASDAQ at 16000 level.

Besides what we know about the bond yields, a repeat of regional banking crisis could play out again in Q1 2024.  This time it is the shadow banks in distress.

The banks have been under careful watch since the financial crisis in 2008-2009.  Banks have retreated from risky lending activities due to tight regulations.  The shadow banks have picked up the role as the risky lenders to fill the gap.

Regulators are overlooking the threat shadow banks pose to the economy

Shadow banks are financial intermediaries that operate outside the traditional banking system and provide credit intermediation services, including lending and investing, without being subject to the same regulations and oversight as banks. It is difficult to determine the size of the shadow banking sector and identify the largest players, as many of these institutions are not publicly traded and do not disclose detailed financial information.

However, some of the largest shadow banks in the world include:

  1. Blackstone Group: An American private equity firm that manages over $600 billion in assets, including investments in real estate, credit, and hedge funds.
  2. The Vanguard Group: An American investment management company that manages over $7.5 trillion in assets, primarily through its index funds and exchange-traded funds.
  3. Bridgewater Associates: An American investment management firm that manages over $150 billion in assets, primarily through its hedge fund strategies.
  4. Pimco: An American investment management firm that manages over $2 trillion in assets, primarily through its fixed-income investment strategies.
  5. Ares Management: An American alternative asset management firm that manages over $200 billion in assets, primarily through its private equity, real estate, and credit strategies

The Fed might cut rates fast next time due to the repeat of 2023 regional banking crisis.  The stock market for sure will selloff during the crisis.  That is the time to get aggressive to buy stocks.  We have to wait.

Below is the S&P 500 daily chart.

We are looking for the S&P 500 to reach 5110 by next week.