Closelook at US Stock Markets - Post 06

The 10-and 20-year US T-Bond yields continued to rise yesterday, but risk-on equities led by the MegaCap-8 stocks rallied.

The bond yield is returning to normality, and risk-on equities will be able to cope with higher yields.

What happened?

Yields are returning to the levels seen before the 15-year period spanning the Great Financial Crisis (GFC) and the Great Virus Crisis (GVC) when the Fed and other central banks kept interest rates abnormally low.

So what?

There might be more short-term downside risk if the 10-year approaches the level of the 2-year close to 5 %, but ultimately the stock market might be OK with bond yields returning to their old normal. Given that core CPI inflation ex-shelter (shelter in the official CPI numbers is lagging by about 14 months, actual numbers from, e.g., Zillow see a downturn) is down significantly below 3 percent and declining, we do not see long-term yields rising higher than the current 2-year yield.

Now what?

It is all bout real yields. A good way to analyze historical performance is by analyzing the historical performance of the 10-year TIPS yield. TIPS stands for Treasury Inflation-Protected Securities. The 10-year yield was down to a low of 1.06% on April 6 and rose up to 2.00% on Monday 21st, August.

The forecast

We expect it to normalize around 2.00% in the short term, which is where it was during the period from 2003 to 2006, the period before the GFC of 2008. From 2010 until 2022, the TIPS yield fluctuated from +1.00% to -1.00%.

Given this, a 2% reading is quite restrictive. So we expect the TIPS yield to move closer to the +1.00% to -1.00 % level once the FED will be loosening its restrictive stance in 2024.

And the NASDAQ?

We maintain our long-term bullish stance. Core inflation has peaked. Productivity gains have been rising swiftly in 2023, and the profit recession has come to an end.
The seasonally weak third quarter represents a unique buying opportunity. On 21st August, we have seen the first positive technical divergences as the Mag-8 rallied when yields rose.

What we do

Step 1 - We wrote calls on all our long position at the end of July. We will now buy them back with nice profits.
Step 2 - We prepare for adding long positions but wait for Nvidia earnings and Jackson Hole to provide a clearer picture. Remember, when it consolidated, we added Nvidia at a bit above 400 USD. We also added Novo Nordisk (NVO) and Vertex (VRT).

The upward-sloping trend channel of the NASDAQ 100 is still intact. See the chart below. At the first attempt, such support usually never breaks. It may well break with the second attempt after a weak bounce. Also, the current upward channel is quite steep, too steep to hold for the long run, imho.
I would expect the current upward channel to be replaced by a more moderately upward-sloping one to provide long-term direction.

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