The Fed Is Daring The Bond Market Now
Growth, Long/Short Equity, Momentum, Macro
Seeking Alpha Analyst Since 2014
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
MARCH 17, 2021
STOCKS – MO, DIS
MACRO – SPY, VIX
Mike’s Reading The Markets (RTM) Premium Content – FREE 2-WEEK TRIAL
- FOMC: Uber Dovishness From Fed Likely To Drive Rates Even Higher
- Midday Note - It's Show Time
- Morning Note: The Question Isn't What Powell Will Do, But Who He Fears The Most
- Midday: Massive Options Bets Suggest Volatility On The Way
- Morning Note: VIX Holds The Key To What Happens Next
- Midday: Stocks Move Higher As Vix Gets Close To Breaking
- Morning Note – Watch Out For A Surging Dollar
- T.W.A – This May Be The Most Important Week Of 2021
Stocks finished the day higher after a volatile session following the FOMC announcement. The S&P 500 was down nearly all day as rates rose on the 10-Year, but that changed after the Fed announcement. The Fed's statement and guidance were in-line with what they had been saying all along; they plan to let the economy run hot and not raise rates until they reach their outcome-based goals. Equities took this as a cue to rally, and they did, with the S&P 500 finishing the day higher by 30 bps, to close at roughly 3,975. This continues to be the upper end of my range; I have been using the futures, saying a range of 3950-3960, the futures were trading at 3,962 at the close.
I am not surprised that the market rallied on the news; in fact, I pretty much said the Fed would move to appease the equity market and that stocks would likely rally. But this is a sign that Powell wants the economy to run hot, and Powell is all but daring the bond market to push rates even higher, and the bond market may take him up on that. (Premium content - first 2-weeks are free to try - FOMC: Uber Dovishness From Fed Likely To Drive Rates Even Higher)
The dollar is clearly worried about inflation, as it plunged today after the announcement, dropping all the way back to 91.50 on the dollar index.
I sense that rates on the long-end have much further to climb, even if there is no inflation or low inflation. After all, Tip yields are still negative 65 bps; they had only traded this low one other time back in 2012. It would seem at this point; we are not likely to enter a deflationary period. I don't see why the 10-year TIP yield can't push back to say 0%, which would imply that the 10-year rises to around 2%, maybe 2.25%. I don't see why the 10-Year TIP should continue to trade at a negative rate when the Fed targets a PCE to start coming in north of 2%.
The chart on the 10-Year Tip would suggest higher rates are likely coming.
The thing is, on the surface, it is hard to see how higher rates have already started to play out in the equity market, but they have. Just look at any of your favorite growth or technology stocks; most are down significant amounts.
NASDAQ 100 (QQQ)
The QQQ, to this point, has been unable to push back above their March 2020 trend-line. There was a test yesterday and another attempt today, but it failed. I would not positively view that.
Disney continues to play inside of this rising wedge pattern. It might have even a little bit higher to climb, perhaps to $205-207. But the pattern is notably bearish, and the RSI is telling us the trend to follow is likely down.
Altria is one stock that may continue to head higher, the stock is breaking a multi-year downtrend, and if it passes resistance at $50, it has room to run to $58.
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