2 Significant Positive Events Aren’t Enough to Fix the Market
A Treasury intervention and 170% move in Moderna produced only a 0.2% gain in the S&P 500.
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Two pieces of good news hit on Wednesday and neither one is likely to change the character of this market. The Treasury announced it would step up its bond buybacks and Moderna (MRNA) surged more than 170% on cancer vaccine results that lifted the entire biotechnology sector. The indexes finished up around 0.2%.
A one-day event of that magnitude, combined with government intervention in the bond market, produced a gain smaller than the futures indicated before the open. The same issues are still sitting there. Heavy rotation, negative seasonality, and a lack of catalysts.
The Fed and Treasury Are Working Against Each Other
The bond news is of particular importance.
Treasury Secretary Scott Bessent has been open about wanting lower yields to bring down mortgage rates, and it has not worked. The 30-year topped 5.3% this week, the highest in nearly two decades, and average mortgage rates have crept back toward 7%. The deficit is running near 6% of GDP against Bessent’s own 3% target. So he did something unconventional and announced a significant expansion of the buyback program.
Jim Bianco of Bianco Research has been saying that bond traders can stop panicking when the Fed starts panicking. After Wednesday, he noted that he should have said they could stop panicking when Bessent starts panicking. The problem is that we now have Bessent and the Fed pushing interest rates in opposite directions.
The Fed is holding with three members dissenting that want a hike and Kevin Warsh declining to signal anything about the path ahead. Bessent and the Treasury don’t control the policy rate, so they are working the long end by buying back its own paper. It is fairly obvious the midterm election is driving the timing of this action.
This tension in the bond market makes things harder to navigate. Normally Fed policy controls the yield curve and that is where the market looks for information. Now the long end has a second player with different incentives.
If yields fall, we cannot tell whether inflation expectations improved or the Treasury bought. And nobody knows the limit on how far this goes, because there is no precedent for using the buyback program this way.
Underneath all of it the inflation and Fed policy dilemma remains. Inflation is above 3% while the labor market is losing jobs and the consumer is pulling back. Rates need to come down for the economy and they need to stay up for the inflation problem, and no amount of bond buying resolves that.
Watching the Indexes Is the Wrong Screen Right Now
Investor’s Business Daily is looking at the same market I am looking at and seeing something different. They pointed out on Wednesday night that the S&P 500 held above its 21-day exponential moving average for a thirteenth straight session, and that both the 21-day and 50-day are sloping higher. The combination suggests the market may be going into what they call a power trend.
Those observations are accurate and sound quite bullish but I believe they are missing a few things.
Wednesday’s gain came from one stock. Moderna surged and carried the biotech group, and without it the indexes finish red. Meanwhile, the VanEck Semiconductor ETF (SMH) fell 1.6% and has dropped more than 5.5% in two sessions, back below a flattened 50-day. The group that had been leading is breaking down and a group that was not participating three days ago is carrying everything.
An index can hold its moving averages indefinitely while the leadership underneath rotates through every group in the market. That is not the same thing as an uptrend. It is a market where money never leaves but never commits either. The bottom line is that despite seemingly good news the price action deteriorated all day on Wednesday.
Game Plan
My approach is to stay vigilant while holding higher levels of cash and moving incrementally as stocks find support levels.
We have about five weeks before seasonality turns positive and third-quarter earnings begin. It is too early to start building big positions. There may be some volatility trades and the usual day trades along the way, but longer-term positioning requires patience right now, and there is no reward for rushing it.
The setups I want develop after a stretch like this rather than during it. Nothing that happened Wednesday changes that, and the reaction to the news is what tells you so. I’ll be looking for new ideas and opportunities but I don’t expect to make any significant moves.
At the time of publication, Rev Shark had no positions in any securities mentioned.
