The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Spooked.
Futures traded off a bit overnight and the index opened down about 35 points. Treasury yields had climbed in the early morning and the 30-year broke above 5%. The 5% yield level was a psychological threshold that injected some worry into the stock market. Apparently, yields getting over 5% was more worrisome than the Moody’s downgrade. Anyway, the dip-buyers saw the down open as another opportunity and pushed the index almost to unch’d by midday, at which point the 20-year Treasury auction results came out. It was a weak auction. Cue up all the fears of the morning and then some. The S&P dropped 70 points in a handful of minutes. Over the rest of the session, higher yield talk and worries about the bond market spread, resulting in further weakness for stocks over the remainder of the day. For all of the drama, capital flow was only 104%.
The aggressive bounce stalled yesterday and today it hit a snag. This was due to a fundamental development. This isn’t a bolt-from-the-blue event but it was surprising. All market participants understand that the Treasury market’s climbing yields were of *some* concern. It was unknown *at what point* the higher rates would matter. Turns out 5% for the back end of the curve is the point. Additionally, all market participants understood that a weaker Treasury auction was a risk. It was unknown, *if* a weak auction was going to show up. Turns out, today it did.
We are now sensitized to the risks of the bond market and the fiscal situation of the US government. If things get worse on that front, stocks will suffer. It remains to be seen if a couple of strong auctions will cure the current sentimental ailments.
Back when US Treasury auctions were of great concern, there were a couple of weak ones that scared everyone greatly. They were followed by strong auctions, which made everything better and everyone went back to buying the dips and adding risk.
That’s the playbook everyone has open at the moment. It’ll work when we get a string of strong Treasury auctions. When’s that going to happen?
Time to watch and wait.
See you tomorrow.
-Mike
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