In a recent article for Barchart, "What Could Help the Stock Market Find a Bounce?" I discussed a significant seasonal buy pattern window that opened on October 26, one day before the recent bottom in prices. This article is not about the seasonal pattern working because I mentioned that the trend would have to turn up to get my attention, and on today's close, I see an uptrend. I also mentioned that this is probably a trader rally and not one for investors. I still stand by those two observations.
Coming into this week, the markets were anxiously waiting for multiple pieces of information. The two most significant were the Federal Reserve (FED) Monetary Policy meeting and today's Employment report.
Before these reports, the S&P 500 and 10-Year Treasury futures were in oversold territory basis the daily timeframe Relative Strength Indicator (RSI) with a reading of less than 30. Markets at these extremes are subject to sharp price direction changes as the market sentiment has turned overly bearish.
Interest Rates:
FED meetings' most direct and significant impact is on interest rates. When the FED announces an interest rate change, it can influence borrowing costs throughout the economy. If the FED raises interest rates, it can lead to higher bond and savings account yields, which may attract investors looking for better returns. Conversely, borrowing can be cheaper if the FED lowers rates, potentially stimulating economic activity and boosting stock prices.
Chairman Powell greeted market participants with no change to the Fed Fund rates. However, he clearly stated that there has "absolutely" been no discussion of lowering rates in their behind-closed-door meetings. He reiterated that the 2% inflation target is still their primary objective.
This leaves the market in an inverted yield curve scenario with the 3-month and 10-year treasuries. Short-term rates are still higher than longer-dated maturities. If the FED is stead-fast on not lowering short-term rates, then to get back to a normal yield curve, the 10-year yield will need to continue higher.
The market sets these longer-dated maturity yields, not the FED. Before the recent FED meeting, the longer-dated maturities were concerned about the government's debt and spending habits, resulting in higher yields. None of that has changed this week. With the support of our Middle-Eastern ally, Israel, the US will most likely need more funding for this recent outbreak. This will result in higher-yielding treasury securities being sold to fund the crisis.
Stock Markets:
Stock markets often react to changes in interest rates and the FED statements. A rate cut or dovish (accommodative) tone from the FED tends to be perceived positively by equity markets. It can lower the cost of capital for businesses and increase the attractiveness of stocks relative to other investments. However, if the FED raises rates or adopts a hawkish stance, it can lead to concerns about higher borrowing costs and slow economic growth, which may result in stock market declines.
Coming into this week, the S&P 500 daily and weekly trends were down, while the monthly trend remained up. All trend changes start on the smaller timeframes and proceed to the higher timeframes. The seasonal buy window that Moore Research Center, Inc. (MRCI) has identified and that I wrote about in my recent article, beginning on October 26 and ending approximately December 02, has a 100% success rate over the past 15 years. A pattern like this would have many traders looking at it for a possible trading opportunity. The oversold condition of the stock market created almost the perfect storm for a significant price direction change as the markets were looking for any reason to force the short sellers to cover some of their bearish bets.
The longer-dated interest-rate products fueled the fire Wednesday after yields fell after the FED announcement from a 5% yield not seen for multiple years. Treasury yields were primed for a direction change, and speculation was that the FED had peaked in their interest rate hike regime. This allowed the stock market to find more reason to squeeze the shorts and cause a rally.
The stock market reacted to the recent employment number in a bullish fashion. The employment rate rose to 3.9% from the previous month's 3.8%. While only adding 150K new jobs as the markets were anticipating 180-190K. This was this year's second-worst job report compared to June 2023, where only 105K were created. Equity traders ran with this headline number, increasing equity prices for the day.
The equity markets have already had a significant rally off the recent lows coming into the employment report. Some will argue that the employment report is a lagging indicator. This leads me to believe that, as the market corrects some of this exuberance, market comments next week may be, "One report does not make a trend."
From a market-breadth standpoint, the S&P 500 futures rally from October 26 to November 02 has seen a decline in open interest of 27K contracts. Declining open interest indicates position liquidation, not new buying and selling to support a longer-term up trend. Open interest for the day of the employment report was not available at the time of this writing, but I'm sure significant attention will be given to it when it comes out tomorrow.
From my recent article, my interest in a bullish position for this seasonal rally was for a trading opportunity only, not for investing. Nothing fundamentally has changed this week on the macro scene from last unless you believe one report makes a trend and that they will pause raising rates while inflation is far above their 2% target.
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