Stocks continued their descent Wednesday, as market participants reacted to two days of sharp rises in the yield on 10s. The day's activity left the Nasdaq 11.6% from its November record high as it drops below the 200 ma.
The S&P, while in its own decline, benefits from less exposure to technology and growth stocks generally. It is off just 6.0% from its recent record high. The divergence between the Nasdaq and S&P is clear when one compares the positioning of each average to its 200 ma line. Note the head-and-shoulders top in the S&P.
What has the market buzzing is the bond market, which showed a 15 bp rise in the 10s yield in just two days this week.
It should not be a surprise that stocks are having a tough time handling the backup in yields. This is how the typical bull market ends.
Again, the best thing to happen would be if the economy slows down, along with inflation. This would likely make recession-resistant growth stocks more attractive vis-a-vis cyclicals. We are already seeing the retailers correct, which suggests the market is already discounting an H2 slowdown. (Retail sales are one-third of the economy.)
Our five short positions (including inverse ETFs) continue to pick up ground. Of particular interest is the two inverse ETFs, Tuttle Capital Short Innovation ETF (SARK) and ProShares UltraPro Short QQQ ETF (SQQQ). While there will be pullbacks, these have the potential to be held as position trades if aggressive growth continues its decay.
Otherwise, with fresh-money long and short ideas off the table, we remain content to stay in cash. Let's stay patient and be thankful we learned from Bill O'Neil how to protect precious capital in inclement weather.
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