Market Brief – Thursday 10/4/18

When liquidity dries up, stock prices fall. Yesterday’s news pointed to strong growth out of the factory sector, which has analysts believing tomorrow’s Nonfarm Payrolls report could show upwards of +500,000 jobs created. With wages still rather low, it’s hard to understand where all these workers are coming from. What we do know is at this point in the business cycle, when labor is constrained, the quality of workers available is low.

Yesterday’s bond rout has everyone looking for answers, but we do know Fed Chair Powell’s comments about taking the Federal Funds rate over the “neutral” rate, likely caused the computer algorithms to heavily short Treasuries. Any rapid move in the markets today is most likely coming from automated computer trading programs.

The market believes the “neutral” rate, where rates are not too loose but not too tight, is between 3.00-3.50%. The market responded by pushing short- and long-term yields higher to compensate. Those who understand the effects of the Fed’s balance sheet unwind on short-term rates already knows we are in the neutral rate today.

When yields rise liquidity in the market dries up which causes stock prices to fall. From what I can tell, most computer trading programs are 100% allocated to stocks. As stocks fall, those programs sell. To avoid further selling, traders started buying in late-morning trading to keep these programs from dumping stocks. If liquidity is drying up, there will be continued downward pressure on stocks, regardless of the news.

Despite all the talk that Treasury yields are headed to 4-6%, which they aren’t, trading volumes have been high on the Treasury ETFs. High volume during a sell-off is indication buyers are soaking up all the shares being sold. For the past couple of days, sellers had the upper hand. Today, buyers were putting a halt to the price drop.

I believe this last surge in yields is a blow-off top which is when the price of a security moves dramatically in a short period to pull in all the remaining buyers or sellers who have been sitting on the sideline waiting for an opportunity to enter the market. A decelerating money supply and falling monetary base are bearish for yields.

On Tuesday, agricultural commodities surged on a small short-squeeze. On Wednesday, short-sellers were back. Today, short-sellers found out there aren’t many other sellers and that those who recently bought, aren’t selling either. This is another potential sign a bottom is in.

Physical gold failed to hold above its 50-day moving average for the third day in a row. Large gold miners did find support, but (symbol GDX) continues to get rejected at $19 per share. The battle between the bears and bulls continues.