Wednesday's Market Minute: FOMO Time's Approaching if Bears Can't Reclaim Control

Tuesday’s rollercoaster reaction to inflation was the latest example of a visceral tug of war happening in U.S. stocks as the market’s jets cool following a fiery start to the year that ignited hopes for a new bull market. 

Short-to-medium term indicators favor bulls after January’s blistering rally that triggered all kinds of positive momentum and breadth signals, but without a 20% rally off the lows and only one marginal higher-high on the year-long chart of the S&P 500, bears have long-term tailwinds at their back. Jay Powell’s dovish embrace seemed to give stocks the all-clear to continue loosening financial conditions, but buyers suddenly got cold feet when last month’s payrolls report printed eye-popping gains.

The Fed Chair’s recent indifference to higher asset prices echoed loud in the market on Tuesday as the Nasdaq rebounded from successive sell-offs after a warmer-than-expected CPI that’s becoming increasingly tied to service-oriented demand sources, as opposed to supply chain effects that seem to be almost entirely worn off. Had Powell’s tone at the start of this month been more aggressive, stocks would have taken a beating after a print like that.

Somewhat amazingly, bitcoin even went vertical at one point, a small rally by crypto standards, but the type of move that’s more characteristic of feverish, FOMO-style speculation, as opposed to the steadier, buy-the-dip action that’s defined most of this latest rally.

For traders trying to divine the next move, watch the relationship between the U.S. dollar and interest rates. These two macro assets have been trading in lockstep for the entirety of the post-COVID regime, and have been reliable in their relationship with stocks. The drop in the dollar since its September high has been much steeper than that of the 10-year yield, which found support at 3.5% and has been consistently rising since the employment report. 

If the 10-year yield gets back above 3.9%, it means it’s probably trending higher again, which would mean the dollar likely has some catching up to do. If the dollar’s pumping, stocks and crypto won’t be. The Fed’s tried to withdraw from the international spotlight as other central banks step up their rate hikes, but a big rip in Treasury yields would pressure Powell to hike harder. 

If the dollar doesn’t say it's happening (I'm watching 104 on that chart), brace yourself. The gappy behavior in bitcoin yesterday means it could get weird again.

Image sourced from Shutterstock

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