Stocks fell this morning as the bear market rally finally cooled. The Dow, S&P, and Nasdaq Composite all tumbled while yields climbed. The 10-year Treasury yield advanced to 3.55% as bonds sold off again.
Big Tech mega-caps Meta (NASDAQ: META), Alphabet (NASDAQ: GOOG), and Microsoft (NASDAQ: MSFT) fell more than 2% through noon amid a broader tech slump.
Ford (NYSE: F) shares sunk, too, after the automaker cut prices, following Tesla’s (NASDAQ: TSLA) price cut last week. Ford also announced that it would ramp up production for its electric Mustang Mach-E crossover, which has been seen as a direct competitor to Tesla’s Model Y.
TSLA shares fell as much as 5.40% on the day before recovering slightly.
More than anything, though, today’s losses were driven by nervous bulls looking to take profits. The “week from hell” starts tomorrow when the next FOMC meeting gets underway. Apple (NASDAQ: AAPL), Meta, Amazon (NASDAQ: AMZN), and Alphabet report earnings as well, providing investors with plenty of opportunities to get whacked for major losses should anything displease the market.
Many Wall Street strategists have positioned themselves for a correction as a result.
“You’re seeing this push and pull in stock prices between whether the Fed will keep interest rates where they are throughout the year or whether they’ll pivot to cutting interest rates. That’s what you’re seeing in terms of maybe a little bit more of the intermediate-term rise in stock prices,” said US Bank’s Tom Hainlin.
“We would fade that rally because our perspective is the Fed is going to keep interest rates high for some time.”
This attitude is also reflected in bond futures, where traders are short at historic levels. Net-short, non-commercial positions across all Treasury maturities tallied 2.4 million contracts as of January 24th. That’s the most ever, and it goes against the narrative that a peak in rate hikes is almost here.
Source: Bloomberg
“The surge of bets against Treasurys may be driven both by the risk for a hawkish Federal Reserve meeting this week and also the longer-term concern that a soft landing would mean higher yields,” said BetaShares Holdings portfolio manager Chamath De Silva.
“If the US economy can thrive in the face of the tightest hiking in recent history, then that should mean we end up with a higher neutral rate and a re-steepening of the yield curve.”
While good for the US economy, a soft landing would wreak havoc on rates. Would a mild recession be enough to prevent a rate-driven selloff? Maybe, maybe not.
But bonds tend to lead stocks, and in the short term, it seems as though a retracement is in the cards.
Keep in mind, however, that if stocks do end up rallying this week, nobody will be ready for it. Tech shorts have reached nosebleed levels following last week’s rally.
Another massive short squeeze would emerge as bearish hedge funds scramble to cover.
For the week ahead, that means stocks will probably go down. But if they don’t? Look out above, because the ongoing market melt-up – in stocks, bonds, and crypto, too – might become even more epic heading into February.
