Investors continue to focus on inflation and the Fed's monetary policies. Although Fed Chair Powell warned of further rate hikes, the stock markets rallied strongly into the end of last week.
What drove stocks higher with CPI data soon to be released tomorrow and the September FOMC meeting next week?
With rates rising and the stock market correcting, an oversold condition prompted another technical bounce. Stock indexes surged above their 50-day moving average, which may have triggered a short squeeze as many of the growth and speculative names rebounded sharply from depressed levels.
Rising interest rates are typically negative for stocks, and growth names are especially vulnerable to sharp rate increases as future earnings fall.
The enclosed Nasdaq Composite Index (COMPQ) chart shows the inverse relationship between COMPQ and the 10-year Treasury yield (TNX) over the past year.
As TNX soared from the Nov/Dec 2021 low of 1.343% to the Jun 2022 high of 3.483%, COMPQ plummeted from a record high of 16,212.23 (11/22/21) to a low of 10,565.13 (6/16/22), losing 5,647.10 points or 34.83%.
An extremely oversold condition developed in COMPQ and an overbought condition in TNX ignited the summer rally. TNX quickly declined to 2.525% (8/2/22), and COMPQ rallied to 13,181.09 (8/16/22).
From an intermediate-term basis, the recent market actions do not signal a pivotal stock market turning point as the primary downtrends remain intact. Stock markets are trading below their 200-day moving averages and the 50-61.8% retracements from the Nov 2021/Jan 2022 all-time highs.
Investors and traders can expect further market volatility over the near term. The CPI report comes out tomorrow, triple witching options expiration occurs on Friday, 9/16/22, the September FOMC meeting is next Tues, 9/20/22, and Wed, 9/21/22, and the end of the third quarter window dressing is the following week.
Interestingly, the recent 4-day COMPQ rally coincided with TNX rising, an unusual situation given the inverse relationship between the two markets.
Nonetheless, TNX nears critical resistance at 3.483%, corresponding to the 6/14/22 reaction high. COMPQ reversed above its 50-day ma (12,091.25) and may soon revisit its mid-August highs (13,181.09).
The above developments warn of another inflection point as TNX challenges pivotal resistance at 3.483% (8/16/22). A convincing surge above 3.5% confirms a breakout and hints at higher rates.
However, repeated failures to clear 3.483% confirm a double top, leading to a decline in interest rates.
COMPQ also nears critical resistance at 13,159 (200-day ma), 13,181.09 (8/16/22 high), and the 50% retracement (13,389) from Nov 2021 to Jun 2022 decline.
Inflation may have peaked in July, but will interest rates also peak?
According to Fed Chair Powell, fighting inflation remains the Fed's top priority. Inflation rates remain well above the Federal Reserve's 2% target level.
Although FOMC has hiked short-term interest rates by 225 basis points this year, investors continue to anticipate further Fed hikes into 2022 and 2023.
Bonds tend to lead stocks. In turn, stocks tend to discount economic conditions months and quarters ahead of pivotal turns. The future trend of the stock market, including COMPQ, may depend on the direction of interest rates.