The Bond Market Has Doubts About This Rally
Stocks are celebrating a softer rate outlook but the bond market is flashing warnings, oil is cranking higher, and we’re bracing for the CPI report.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
The indexes are flat to start on Tuesday, and the theme from Monday remains in play. The price action has been solid, but there is some stalling on low volume, and the key question is whether the market can generate fresh momentum now that earnings season is finished and the focus shifts to macroeconomic data.
The Bond Market Is the Warning
The most significant issue on my screens this morning is that the 20+ Year Treasury Bond Fund (TLT) is hitting new multi-year lows. The 10-year yield was up on Monday to 4.71% and the selling in bonds continued overnight in Asia.
The bond weakness is happening while stocks rally, which is the divergence that needs to be monitored. Long-term bond investors are demanding better returns at the same time equity investors are celebrating a weak jobs report as a reason the Fed will not hike. That is inconsistent, and the bond market is typically better at reading inflation.
Oil is the immediate problem. The move there has been substantial with Brent jumping nearly 8% this week and briefly touching $90 on Tuesday morning. Momentum for an Iran deal has stalled again with both sides laying out new demands. Iran published a draft plan that would ban U.S. and Israeli ships from the Strait entirely and bar other nations it says harmed it until compensation is paid. Trump says he is going to charge Iran for all the damage it has caused and that is now part of his negotiating demands.
CPI Is the Test
The July consumer price index report arrives Wednesday with the producer price index on Thursday. Those numbers matter more than usual because the entire bull case from Friday rests on a softer rate outlook. The weak jobs report cut the September hike odds from 67% to 44% and doubled the odds of no hike this year to 25%. A cool CPI keeps that repricing intact but there is risk that the jobs report was just an aberration.
July CPI measures July, and oil spent much of that month coming down from its spike. This week’s 8% jump in oil will not show up in the data until the August report next month. So we could get a friendly number Wednesday that is already stale, while the input that drives the next reading is running higher as we speak.
That is what the bond market appears to be pricing. Long-term investors are not trading the July number. They are looking at $90 oil and a Fed with three dissenters and deciding they want higher rates if they are going to buy long bonds.
The Exposure Model Went From Zero to 60 in Eight Days
Investor’s Business Daily has moved its recommended exposure from 0% to 20% up to 60% to 80% in eight sessions. That is three increases in a week from a system that was maximally defensive not long ago.
The system is doing what it is designed to do, which is react to price rather than to fundamentals. But a jump that fast is itself a measure of how much FOMO has developed. Two weeks ago nobody wanted to own anything. Now the models are telling people to be two-thirds invested and the stocks that were left for dead have doubled off their lows.
That is not a reason to be bearish but it is a good reason to notice that the easy part of this move may have already occurred and that new entries may be challenging.
The Chips Are Not Cooperating
The semiconductor sector group (SMH) lost 2.2% Monday, which is a concern given that the group led the bounce. Keep an eye on Nvidia (NVDA), which dropped nearly 3% on Monday.
The chips never recovered their 50-day moving average during the rally and the overhead supply from July is still sitting there. If the AI trade were repairing itself, the semiconductors would be leading rather than lagging on a quiet day.
Game Plan
My focus stays on the smaller stocks that have reported well and are consolidating their gains. That is where the action has been and it is where the entries are developing.
I am not going to chase this market and I am keeping stops tight. The combination of a bond market flashing warnings, oil going the wrong direction, CPI on deck, and a calendar that empties out after this week is enough to keep me defensive even while the price action stays constructive.
The stocks I want are still developing entry points and will be there for a while. If CPI cooperates and the market holds up through the quiet stretch, there will be plenty of time to add exposure with better information than I have this morning.
At the time of publication, DePorre had no position in any security mentioned.
