The stock market saw some nice upside follow-through yesterday…and the advance came on solid breadth (5 to 1 positive on the SPX and 4 to 1 positive on the NDX). However, the volume was quite light…at just 3.65mm shares for the composite volume. The rally since last Tuesday’s intraday lows left it almost 6% above its intraday lows a week ago on the S&P 500 and almost 7% higher on the NDX 100 Index. This might have taken away at least some of any upside potential in the stock market if this morning’s inflation number is lower than expected…and it certainly leaves the market more vulnerable if the number is higher than the consensus is looking for this morning. (Maybe that’s why the VIX actually rallied almost 5% yesterday…even though the S&P and Nasdaq both rallied more than 1%.)
We’d also note that yield on the 10yr note pushed higher as well…and finished the day at its highest level since June (at 3.36%). The yield on the 2yr note…which many people believe is the more important on to watch now-a-days…closed at new highs for this move (at 3.57%). In other words, the rally in the stock market did not get any help from the Treasury market yesterday.
Of course, everything could change this morning…after we get the CPI report. The consensus is looking for a decent sized decline….from 8.5% last month, to 8.1% for August. This is not a surprise given the decline in many commodity prices last month…including a 25% drop in gasoline. However, it does sound like the whisper number has a 7 handle on it, so maybe that’s why stocks have been bouncing recently.
To be honest, there really isn’t a lot we can add this morning to our thoughts about the very-short-term potential for the stock market. This morning’s inflation data could render anything more we could say about the very-short-term outlook rather moot in a nanosecond. Therefore, we’d just like to quickly touch on one issue that could/should become important after we get past the next few days…and the inflation data is behind us.
The issue we’re talking about has to do with “positioning.” Those who have been reading our work for a while now, know that “positioning” in the marketplace is something that we look at very closely. Whenever investors move too far to one side of the boat, it makes it very hard for the market (or stock or group) to move a lot further in that direction. In today’s market, a lot of people are set up for decline…so it’s something that should help buoy the market in the weeks ahead. However, we also have to entertain the fact that one of the biggest positions in the history of the markets is the Fed’s bloated balance sheet that exists today.
There is no question that sharp increases in the size of the Fed’s balance sheet over the past dozen years has coincided with significant rallies in the stock market. (It didn’t work very well INTIALLY in late 2008. But once they changed the “mark-to-market” rules in early 2009, it worked beautifully.) The same was true for 2013 and 2014…and again in 2020 and 2021. On the flip side, the only significant decline in the Fed’s balance sheet…which came in 2018…helped spark a 20% drop in the stock market.
Having said this, we do acknowledge that the stock market was able to rally from 2015 through 2017 without an increase in the Fed’s balance sheet (when it held steady), but the balance sheet did not shrink during that timeframe. We also admit that the market was able to rally in 2019, even though the balance sheet continued to shrink. Therefore, this is not a perfect indicator.
However, there is little question that whenever the Fed’s balance sheet has begun to move in one direction or the other in a significant way, the stock market has reacted in the direction of that move in a significant way as well…before much time has passed. Therefore, if the big increase in QT that is scheduled to take place this month comes to fruition, the unwinding of THAT position just might overpower any other “positioning” in the marketplace…….…Just something to consider as we move through the second half of September and into October.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.