Morning Comment: The big disconnect...which market is right?


It was another wild ride in the stock market yesterday…as the S&P 500 saw a total of FIVE swings on 1% or more (and three others of 0.5%). Five swings of more than 1% would usually qualify as a pretty volatile week, but to have them all in one day shows just how much uncertainty exits in the stock market right now. The net result was a very mixed close…with the S&P finishing the day with a mild loss and the Nasdaq closing with a slight gain. So, although the volume was quite high (at 5.7bn shares on the composite volume), there were not a lot of conclusions that can be drawn from yesterday’s action in the stock market.

The one thing that stood out to us, however, is that the bond market DID see a compelling move. The yield on the 10yr note fell early yesterday…and stayed lower. In fact, by the close yesterday, it had fallen below the level it stood at the opening last Thursday…when the shooting first started and the stock market was flat on its back! In other words, even though the S&P 500 has rallied over 6% and the Nasdaq has jumped since their Thursday morning lows, Treasury yields are telling us that the situation in eastern Europe is going to cause a lot more problems going forward.Given that the Treasury market is usually right when a divergence between the stock and bond market takes place, this does not bode well for stocks going forward……Of course, this does not mean that stock market will roll back over immediately, but it does tell us that investors and traders should seriously consider raising a little more cash if the stock market rises any further over the coming days in our opinion.

The 10yr Treasury yield has fallen even further this morning…and now stands at 1.73%...but it’s not the only market that is telling us that the situation in Ukraine is going to get even more dicey in the coming days. Crude oil is rising again…with both WTI and North Sea Brent trading above $100 this morning. Needless to say, you don’t have to be a market watcher to know that the situation in Ukraine is about to escalate. If you have watched the news at all…and have seen the 40-mile convoy of Russian military vehicles sitting outside Kyiv…you know that things are going to get extremely dangerous for the people of that city very soon. This, in turn, will only raise the sanctions that have already been imposed…so there is no question that the level of uncertainty from a financial, military and humanitarian standpoint is now sky high.

To be honest, we’re not sure why the domestic futures are not trading lower than they are right now. With Treasury yields well below their levels from last Thursday morning…oil prices above their levels from that morning…gold rising again (although it’s below its Thursday highs)…and cryptos rallying strongly (as this asset class seems to have regained its status as a safe haven…with so many Russians trying to use it to protect their wealth)…you would think that the stock market would be much closer to its own lows from last Thursday. Instead, the futures are only down 0.75% this morning (as we write)…which means the S&P & Nasdaq are still standing more than 5% and 8% (respectively) above those lows from last week.

What we are saying is that a big disconnect has developed in the marketplace over the past few days. The bond market (and energy markets) are saying one thing…and the stock market is saying another. One of the reasons that the stock market is holding up so well seems to be the expectation that Chairman Powell is going to use a more dovish tone when he testifies in front of Congress tomorrow and Thursday. It certainly makes sense to us that he’ll take the more aggressive talk (that Mr. Bullard and others have used recently) off the table. In other words, it would certainly make sense for Mr. Powell to say that they will not go with a 50-basis point hike right off the bat. However, we still believe that he will signal a much more aggressive path than they had been talking about in the months before Thanksgiving.

With this in mind, we think that it is only a matter of time before the stock market wakes up to what the bond market (and oil market) is telling it right now. Therefore, as we said above, we continue to believe that investors should use any further bounces in the stock market to raise some cash and add to defensive positions…..Very simply, the bond market is the one that is usually the correct one when a divergence develops between the stock and bond markets.






Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


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.

Posted to The Maley Report on Mar 01, 2022 — 8:03 AM
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