From Euphoria to Fear and Worry Could Smooth the Path for Santa's Sleigh
While there is still plenty of economic optimism, the stickiness of inflation is bothering the bond market.
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The positive reaction to Wednesday’s mediocre CPI report turned into an ugly bull trap on Thursday. The Magnificent Seven MAGS failed to build on its gains and fell 0.75%. Overall market breadth was abysmal, with only 2,300 gainers and over 7,100 decliners. The Russell 2000 (IWM) was down over 1.3%, and Bitcoin-related names reversed down after a good start. The S&P 500 finished near the lows of the day for the fourth session out of the last six.
The S&P 500 is less than 2% off its all-time high, but breadth has been negative for nine straight sessions. According to Jason Goepfert of SentimenTrader, there has never been a losing streak of that length with the S&P 500 so close to highs.
This is happening because a few mega-cap names such as Tesla TSLA and Alphabet GOOGL are offsetting negative action in dozens of other stocks. The average stock is not acting as well, and the divergence between the S&P 500 and the S&P 500 Equal Weighted Index (SPEW) is at extreme levels.
Part of the problem on Thursday was that the PPI report was hotter than expected, but the negative action in bonds TLT is also causing problems. Interest rates are rising in front of an anticipated Fed cut because of concerns that there may not be any cuts at all in 2025 if inflationary pressures do not ease. While there is still plenty of economic optimism, the stickiness of inflation is bothering the bond market.
Speculative action has dried up, which is why the small-caps are now lagging. The biotechnology sector was particularly poor, with shares of the iShares Biotech ETF IBB losing 1.7%. The list of stocks moving up more than 10% was very short, and the biggest problem was that the close for many stocks and indexes was weak.
The good news is that a few days of corrective action, which tempers the recent euphoria and causes some fear and worry, would be an ideal setup for a year-end Santa Claus rally. There are already some pullbacks on my radar that are approaching key support levels that I’m eyeing for an end-of-the-year bounce. Tax-loss selling should be particularly active this year due to the large gains in the major indexes. I’ll discuss that more in a future column.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
