September Trading Sees Fitting End With Higher Rates and 2 Tiers
Bonds had good reasons to rally and didn’t, which benefited the AI mega caps.
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It has been the theme all month, so it is fitting that the last day of September ended with strong two-tiered action and higher interest rates. Heavy selling into the close likely had something to do with quarter-end rebalancing, but it was a poor finish to a difficult month.
The Magnificent Seven managed to hang on to a gain of 0.35% after being higher at midday. The Invesco QQQ Trust (QQQ) rose 0.2%, and the VanEck Semiconductor ETF (SMH) added 0.3%, but the iShares Russell 2000 ETF (IWM) finished down 0.4%, and there were roughly 330 new lows against about 75 new highs on 35% positive breadth.
Rates Are Doing the Sorting
Bonds had several good reasons to rally but remained under pressure all day. The PCE report came in well below expectations, and the odds of an October rate hike dropped from about 51% to 35%. Bonds still couldn’t attract much buying interest, and the 10-year yield moved higher.
Global macroeconomic conditions are driving the bond action, which is why bonds have not been as sensitive lately to oil and U.S. economic data. Sovereign debt is competing with the huge capital needs of the AI industry. That creates a difficult situation for the Fed, which can’t slow down the inflationary pressures caused by rapid AI growth without hurting other parts of the economy.
This is what drives the two-tiered market action. When rates rise, the stocks that depend on cheaper money, such as small caps, biotech and anything with a lot of debt, come under pressure. The big-cap AI names are not sensitive to interest rates. They have massive cash flows and don’t need to borrow, so they become the place where investors hide when yields climb. The strength in the mega caps and the pile of new lows are two sides of the same trade.
That is why the indices can look fine while most stocks struggle. As long as long-term rates keep climbing, the rotational money keeps flowing to the handful of names that are immune to them, and the rest of the market stays under pressure.
What Changes it
The fourth quarter starts on Thursday, and the seasonal picture improves as we move toward the election, but seasonality won’t do much if bonds keep sliding. The market needs a turn in the bond market to broaden out, and Wednesday showed that soft inflation data and a less hawkish Fed are not enough on their own to produce one. We have ISM manufacturing on Thursday and the jobs report on Friday, and I’ll be watching how bonds respond to both.
Game Plan
Nothing has changed in my approach. I’m keeping cash high, making only small incremental buys, and waiting for bonds to show a change of character. When rates stop rising, the two-tiered market will start to unwind, and the beaten-down stocks will be the ones with the most room to run. I’d love to tell you that it’s time to buy, but I don’t think it is.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
