Interest Rates Spike Hopes for Small-Cap Rally
Bond weakness was the culprit for a lack of breadth Tuesday. Here's what caused it.
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The bulls had the advantage of positive seasonality on the first day of the third quarter, but they failed to take full advantage of it.
The S&P 500 SPY and Nasdaq 100 QQQ produced gains, but the Russell 2000 IWM lost ground, and breadth was solidly negative with around 3,300 advancers to over 6,000 decliners. The number of new 12-month lows also expanded and exceeded new highs by the end of the day.
The story is getting monotonous, but big-cap technology names, including Apple AAPL, Microsoft MSFT, and Amazon AMZN, were responsible for keeping the QQQ in positive territory.
The big problem for smaller stocks Tuesday was the weakness in bonds. Interest rates spiked higher, which caused the iShares 20+ Year Treasure Bond Fund TLT to drop by nearly 2%. Higher interest rates are a headwind for small-caps, which tend to carry much more debt than the big-cap AI names that have a flood of positive cash flow.
What caused the spike in rates? There was speculation that the Biden debate disaster increased the chances that the Republicans would not just win the presidency but the House and Senate as well. When one party controls all three, it tends to produce increased spending, and bonds do not like that. The bond market prefers gridlock, but the Democrats have some major problems right now, and the market doesn’t seem to think they will be able to fix them.
I’m disappointed we didn’t have better small-cap action Tuesday, but the indexing moves last week probably caused a bit of a hangover as well. I am still optimistic about more rotational action, but we need to find support before that happens.
Have a good evening. I’ll see you Tuesday.
At the time of publication, Rev Shark was long AMZN.
