The markets are being tossed back and forth by the uncertainty surrounding the Fed and interest rates. This is nothing new, but the belief on the raising rate side is gaining traction and the markets are reacting to the reality or the possibility. Why the reaction? Like me, most have believed the Fed is like the little boy who cried wolf… too many warnings to believe they will actually do something. With that in mind, the indexes fell nearly 2% on the day and are testing the lows from Friday again.
Interest rates were 1.74% on the ten-year bond today as the worries return. The upside in yield is obviously equal to the downside in the price of the bond which fell 1.5% on the move today. This the reason we have warned about the risk of owning bonds in the current environment and the need to have an exit strategy should the rates begin to rise again. Here we are as the entry at the $32 level for TBT was hit last week. The downside is now in play for the bonds near term.
Crude oil fell on the day as well with supply worries still prevalent and the 2.4% decline is keeping the downside in play off the June highs. Gasoline (UGA) follow suit on the downside as well. Energy stocks fell 2.7% as the trend in crude is causing pain short term. The sector remains under pressure as uncertainty continues causing far too many question marks… some of which have no answer. Patience as the downside plays out short term.
The S&P 500 index held support at the 2120 level again. The break of support puts the sellers in control near term and therein lies what to watch as this all unfolds. If the downside prevails the short sellers are likely to exacerbate the situation near term. The downside leadership is coming from the interest sensitive sectors like consumer staples, utilities, and telecom. The sector holding the best is technology. The other nine have bought into the sell side worries. Bias is on the downside near term and we have to watch how it all unfolds.
Running my scans for the day it shows more selling obviously and if we are managing risk stops have been hit and short signals are popping up as a result. The downside sectors to watch are Gold (GDX), China (FXI), Russia (RSX), Emerging Markets (EEM) and Energy (XLE). The commodities have been under pressure the last few days along with interest rates. The tug-o-war is in place and to decide who will win a catalyst of some kind is needed.
What started out as an upside opportunity has turned sour on comments from the Federal Reserve concerning interest rates going higher. Will it happen? Only time will tell and for now we will take it one day at a time with our eye on the yields, economic data, and earnings. Stay focused, disciplined and aware of your surroundings. Don’t assume anything and validate everything for now. Patience is a virtue.