Wednesday’s Tepid Rally Was Led by Defensive Issue
I’d have expected a bond market rally to give stocks more of a lift. But it didn’t. Does that mean we can expect more downside?
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I guess what we got in terms of bond sentiment was hysterical enough, as Secretary Bessent had had enough and decided to do something about it. So we got a bond rally. Here’s the curious part.
If I told you on Monday that bonds would rally this week (well, I did, but…), wouldn’t you have said, stocks would soar? Okay, maybe not soar, but with the S&P already down nearly 100 points coming into Wednesday’s action, I would think a bond rally would net the S&P more than a 16-point rally.
Instead, what we got was pretty pathetic outside of the staples and drugs. Banks got smacked around, as they were down more than two percent. I have said for weeks now that the banks felt over-owned and over-loved to me. Now, with Wednesday’s move, the Bank Index is now down in the month of August. And it’s pretty much trading where it was at the start of July.
I grant you, there has not been a lower low yet, nor has that short-term line broken, but considering I have listened to pundits love this group for the last six weeks, I find it curious there was not even a mention of the banks Wednesday.
And the Semis? They, too, were red. And it wasn’t even that the software stocks, which often move in the opposite direction to the SOX, were hot. IGV was green but unimpressively so.
The industrials were also red. You know what was green? Staples. And of course, drugs. Sounds pretty defensive to me.
Anyway, despite the S&P’s mediocre rally of 16 points, the VIX fell, which means the Daily Sentiment Index (DSI) for the VIX is back at 15. I do not think volatility is going away, nor do I think we are done with the downside.
I want to take a minute to discuss the new lows. Several of you have inquired that the list seems to be littered with bond proxies. By that I mean preferreds, ETFs, etc. This is true. But don’t we all believe interest rates matter? Don’t we believe that if all those bond proxy stocks are on the new low list, that’s probably not great for bonds?
I would note the new lows did contract quite a bit on Wednesday, thanks to the bonds.
But do you ever hear anyone complaining that the new high list is littered with bond proxies when rates are falling? I do not.
I have said many times I do not like to rationalize an indicator. They do what they do. I will not rationalize an increase in new lows because of interest rates but nor will I rationalize an increase in new highs because of interest rates. The only time I can recall taking issue with the new highs was in February 2021, when Nasdaq was triple-counting SPACs as new highs. That was absurd.
