Bonds, Oil and Nvidia Create a Market Mess
Yields jumped on hawkish Fed comments, and the AI issues are far from resolved.
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Bonds came under heavy pressure on Thursday after hawkish comments from Fed officials, oil rose on worries about Iran, and when you throw in the Nvidia (NVDA) drama, we had a market mess. The indexes bounced after a weak open, peaked about an hour into the session and then trended lower for the rest of the day. Breadth was only about 25% positive.
Small caps, which have little to do with the Nvidia issues, were the weakest. The iShares Russell 2000 ETF (IWM) fell 1.6%, and that signals that interest rates are the bigger problem.
Bond Market Reopens
The selling in bonds picked up after San Francisco Federal Reserve President Mary Daly said inflation pressure is up, not down, and that her bias is that further tightening will be needed. Daly is usually one of the more moderate voices at the Fed. She said that she increasingly hears companies say they will pass on higher costs, and she warned that inflation is bleeding into services, where it tends to stick. Cleveland Fed President Beth Hammack added that spending on AI infrastructure is contributing to inflation. The AI build-out already had voters and lenders lined up against it, and now a Fed official is blaming it for inflation.
The 10-year treasury yield pushed above 5.1%. Wednesday’s rally came with the bond market closed, and this is the reaction I was concerned about once it reopened.
The afternoon auction of 30-year bonds didn’t help. It priced at a yield of 5.44% and drew the weakest demand since June. That is the second soft treasury auction this week, after Tuesday’s sale of 10-year notes. When the government has to pay up to borrow, everyone else does too, and that hits small caps the hardest because they depend more on borrowing.
Oil added to the inflation worries as crude rallied after President Trump said the U.S. doesn’t need a deal with Iran. Lower oil has been one of the main reasons the market could shrug off higher rates, and that support is slipping.
Whipsaw for IBD
Ironically, Investor’s Business Daily (IBD) bumped up its recommended exposure on Wednesday night following a technical follow-through day. IBD has been whipsawed constantly by a market that can’t put together any consistent strength. I wrote on Wednesday that the follow-through day came with more new lows than new highs and little to buy, and Thursday showed why that matters.
Nvidia CEO Jensen Huang’s resignation ended some of the uncertainty about his role, but it opened up many other problems. Chips fell about 1.5%, the data-center stocks struggled and the Magnificent Seven were mixed. The AI issues that have been brewing for a while are still percolating, and they are far from resolved. Investors are still holding on to the argument that many AI plays are cheap, but that argument is under heavy attack.
Game Plan
This action is why I’ve been aggressive about increasing my cash levels. There just aren’t many appealing charts, and as I’ve said, I have little interest in trying to bottom fish. I did enter Nvidia on the meltdown, but that had to do with the excessive emotion in the stock, not with trying to catch a value. My stop is $150.
The 10-year yield is the issue to watch most closely from here. The producer price index is due on Friday morning, and a hot number with yields already above 5% would add to the pressure on stocks. Next week brings Nvidia’s earnings on Tuesday and the Anthropic IPO, which is set to price on Wednesday and trade on Thursday.
I’m comfortable holding high levels of cash until this market shows it can string together a few good days.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long NVDA.
