Higher Interest Rates Upset the Market Narrative
The question now is whether the bears will gain further momentum. Here are the factors that are now in play.
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Higher interest rates have been threatening to derail the market for a while, and finally, on Wednesday, they mattered. Interest rates have been steadily rising since the Fed cut rates by a half point on September 18. The market hasn’t been too concerned because the economy stayed strong, and there is a strong likelihood of a quarter-point cut at the next two meetings in November and December.
However, the persistent weakness in bonds has been raising concerns about inflationary pressures, and it has started to have some impact on the odds of future cuts. It isn’t helping matters that mortgage rates have jumped a full point since September.
The indexes have been stalling but have held key support for a while. The economic narrative has been the biggest positive, but this rise in interest rates is upsetting the story, and that is why we had the selloff Wednesday.
Bad news from McDonald’s MCD, Enphase Energy ENPH, and some chip names contributed to the negative sentiment. The Magnificent Seven (MAGS) lagged the action with a loss of 2.2%. The Nadaq 100 QQQ lost 1.5%, while the Russell 2000 IWM had a little relative strength and only declined 0.9%. Breadth was atrocious, with only around 2,000 gainers to 7,500 decliners, and new 12-month lows contracted to the lowest number in a while at 175.
There was a little bounce at the close that took the indexes off the lows of the day, but there was plenty of technical damage. The issue now is whether the bears will gain further momentum and drop prices to some near support.
One positive is that there is a slew of important earnings reports coming up, and actions like those we had on Wednesday will lower expectations and raise the chances of a positive response. One other positive is that small-caps did manage to hold up relatively well. Speculative traders didn’t just dump stocks into a bidless abyss.
While days like this are painful, they may also be productive and help create better conditions for more upside. We’ll have to be patient and see how things develop, but at this point, it is just some healthy profit-taking and not a major change in trend.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
