Getting Hot in Here – And not the “everything is on fire” type of hot but rather the beads of sweat/clammy hands iteration. Trying to pick out the S&P “leaders” today was like trying to spot a chameleon as it was a sea of red, not one sector flashing green and it wasn’t really close. To say there was a fair bit of carnage would be appropriate as the Nasdaq had its 2nd day of more than 2% losses in 4 and while the last two days saw selling abate as the day progressed, that hasn’t been the case thus far. Semis and homebuilders are two of the “standouts” while the WFH stocks also get shellacked. Monthly rebalances could’ve been something to point to as portfolios looked to correct the outperformance of stocks month to date, but that would fly in the face of what we’ve seen from the bond market today (more below). Interestingly, today’s selloff comes just as bears looked to be in the fetal position, the AAII survey suggesting they’ve practically given up. The chart below was triggered from the move on Monday and highlights current market volatility; pretty rare and possibly worrying.

The Notorious BTD… Sometimes a boot and rally is all that’s needed to get the partying back on track. Yesterday’s wild comeback put to rest any doubt that the Buy The Dip mantra has faded, with the S&P fighting back to a positive finish after being down -1.8% for only the 11th time the last decade. That’s made is a lot easier for US indices to put on a repeat performance today: another break higher for Treasury yields sent equity futures lower before the open, but the damage never got serious as FOMO and Fed speakers have continued to help the market come to terms with the new reflation environment. That rebound has turned into a full on reopening celebration, with the S&P only a measly 25bps away from a new all-time closing high! Not much dip left to buy it seems…

Tech Trek… The initial panicky reaction this morning as investors fretted over a modest, if rapid, rise in yields, has since worn off a bit, thanks to cooler heads prevailing (many believe rates are far from being raised for various reasons). Putting the 10Y in perspective, it is at 1.35%, well below any level it traded at prior to the Covid crash of 2020— and financial conditions are still close to the loosest they have ever been. In that same vein, stocks bounced off their lows after Fed Chair Powell’s prepared testimony to Congress eased fears of a policy change. Powell said price pressures remain mostly muted and the economic outlook is still “uncertain.” Despite the reassurance, the Nasdaq is down 1.8%, as investors try to come to terms with the thought that in a rising rate environment, their math starts to change. Over the past six weeks, a record $19 bn has flowed into tech funds, according to EPFR global data. The S&P information technology sector is down for a sixth straight day, the longest losing streak since August 2019 and the Russell is down 2.3% in the past 2 days. Investors are also hastily taking profits in the pandemic winners whose valuations have reached historically high levels —Tesla and Apple have traded down 13% and 4.5% respectively, in the past 2 days (Apple down 11% this month). Could this be the beginning of market jitters or just a bit of a much expected rotation into cyclicals (energy and financials are two of the top performers today), while tech takes a backseat (for once).

Every Dow Has Its Day… New week, same theme and unfortunately for the S&P that likely means a 5th consecutive down day for the first time since the turbulent times of Feb 2020… Reflation remains in focus, and though Treasury yields are taking a bit of a breather, more positive news on the vaccine front has equities playing into the theme with a healthy display of Rotation (VLUE +40bps, MTUM -2.2%). The resulting weakness in the seemingly perennial Tech winners and strength in cyclical reopening names has made for a rare sight among the blue chip indices: the Nasdaq is (was) down -1.5% and the DJIA is green at the same time for just the 5th time in the last 10 years! Don’t count the S&P out from snapping its losing streak just yet either; already we’ve seen the buy-the-dip mentality from last week’s trading carry over to today, with the index comfortably off its -82bps low shortly after the open. Yield may be stealing a lot of attention, but old habits die hard when it comes to equities love…

Long Strange Trip … February 19th 2020: the S&P and Nasdaq both hit an all-time high as China signals more stimulus for its economy reeling from lockdowns, and investors regain confidence the fallout from the coronavirus will be relatively contained… Well Happy Anniversary everyone, what a long strange trip it’s been! Despite all that’s happened in the interim, the first bullet from that day’s View at Two: “Resilient or Delusional?” wouldn’t seem too out of place today. The latest obstacle for stocks of course is rising bond yields as reflation trade picks up steam, and while Treasuries have continued to sell-off today, US equities appeared ready to come to terms with that to end the week on a positive note. That’s looking less certain now; as the 10-yr yield has continued on to reach as high as 1.36%, the S&P has faded from its high of +42bps just before the EU close to trade in the red (just now back to unchanged). Regardless of where indices finish, the week seems destined to end with the same display of FOMO vs bubble fear uncertainty that’s characterized the dip-buying of the last few days…

Two Steps Forward… That’s largely been the direction the market has taken but a few of the bulwarks of this move higher have been dented this week. As such, equities are in retreat once again today, with both the reflation/value-cyclical names and growth/WFH names taking hits in equal measure. Instead it’s 4 defensive sectors that have thus far traded in the red year to date that are leading today; good for them. Banks and energy are in retreat; not coincidentally those two are the biggest gainers of the week but word of another mutant strain, this time out of Finland, and it provided cover for anyone looking to trim. The biggest loser of the day however is the food retail space, Wal-Mart being a drag after a bottom-line miss and guidance on a sizable spending program. Once again the market has revealed its resilience though, buying the dip/blip as the day progressed and shows investors remain at the ready. And while money does continue flowing into VIX ETFs to serve as a hedge, the recent BAML survey reveals PMs are taking higher than normal risk at an all-time high clip.

Hot & Cold… While a chunk of the US continues to grapple with freezing cold temperatures, it’s no secret that the latest market buzz is all about the reflation trade heating up. Equities were basically frozen in their tracks yesterday as the 10-year yield rocket higher, but have broken free today, only to shiver at the thought of a further sell-off in Treasuries and higher inflation on the horizon. Of course data this morning set the tone: a whopping +5.3% MoM print from Jan Retail Sales made it seem like Christmas came in January as consumers got their second wave of stimulus checks, and higher than est PPI data finally delivered the inflationary evidence that’s been needed to back up recently warming expectations. Industrial Production also came in with a healthy beat for good measure just to drive home that Manufacturing is humming along as well. Stocks are paring some of their losses as yields have come of their data-induced highs (10-year almost grazing 1.33% at one point), but clearly with more stimulus on the way and the Fed “not even thinking about” intervening, it’s likely the Treasury trend will continue. The question will be where the money coming out of the bond market finds its new home – how much further can the equities bubble stretch, especially if the USD continues to find new life? (inverted DXY vs SPX below)

Bull Market Reactions… On Friday, the S&P traded at 22.52x projected earnings over the next 12 months, above the 5-year average of 17.96. Some might consider that a sign of frothiness. Yet, the Dow is on pace for another record close as investors only see the colors of stimulus, strong earnings (80% beat rate thus far) and vaccine rollout. It’s now being called a K-shaped recovery, where certain areas of the market are doing well, and others are getting hammered (see: global bonds, which are seeing the worst start to a year since 2013). Today’s performance has been muted, at best, with the S&P hovering around flat and the Nasdaq -40bps, but lingering enthusiasm is credited to commentary from Fed Pres Bullard (conditions in the US are “generally good”) and upbeat manufacturing data. Further, freezing temps across the US have injected new momentum into Energy, with natural gas futures +4%. Banks are also top of the charts. Some may give credit to less-dire Fed stress tests that have given the likes of JPM and BAML at least 2% upside. But also, there is a wave of euphoria with regards to imminent re-opening that has rendered certain sectors (illogically?) exuberant. The cruise lines for example, are up over 6% each so far today (Carnival +8%, RCL +7% and Norwegian Cruise + 6%). This, despite Norwegian extending suspension of its Voyage for another month. What’s one more month in a global pandemic??? Finally, of note today is the dollar, which has cut some losses, bouncing off 3-week lows. Impressive, until you notice Bitcoin broke $50k. More on that below.

Whoop Whoop… With Presidents’ Day on Monday (one of the best fake holidays of the year), the few people that do report to the floor of the NYSE these days are getting ready to ring in the 3-day weekend with the traditional 3:33pm “WHOOP.” Equities don’t seem to be sharing the same enthusiasm, rather they seem to be mailing it in to cap off of an already boring (or is it?) stretch the last few days. With the SPX bouncing around unchanged, Transports are leading the way towed by FedEx (FDX +3.0%) gaining after it delivered a pleasing divi declaration (still just below its 50-DMA though). Banks and Energy are among the outperformers thanks to yields going better along with oil (of course the two linked through all the recent inflation chatter). Illumina (ILMN +13%)’s well-received reporting has helped Pharma. Somewhat surprisingly Disney’s (DIS -1.9%) streaming subscriber beat and resilient parks performance hasn’t stacked up the recent bullish expectations, thus Media is struggling despite another day of Twitter gains (TWTR +5.6%). Newell Brands’ (NWL -7.9%) lackluster guidance is weighing on the Apparel space.

TREADING WATER (OR THIN ICE?) – There is no reason to hit any alarm bells and the main components of the bull market remain in place. Stimulus is coming, the Fed is at the ready (today’s soft jobless claims figure highlighting his comments about the labor market being a long way from full recovery) and Covid news is trending in the right direction. Yet equities seem stuck in neutral after snapping a 6-day winning streak. Energy has been on a tear of late but its serving as the biggest drag today, the IEA cutting global consumption forecasts providing an easy enough reason to take some money off the table. As such, value/cyclicals underperforming today. Not the case for the growth space although its largely being led by one group in particular. When in doubt, the semis are stout, and they’re ripping again today as they have been for much of February. Talk of chip shortages barely caused a ripple but it was enough for the Biden administration to say they’re taking aggressive measures to address it. (What, no tweet Joe?). Recent all-time highs in many well-known indices keep sentiment upbeat, but as discussed yesterday, the integrity of the Russell 2k has been somewhat compromised thanks to the “meme” stocks. Which is why breadth may be a better indicator. In which case, the highest ever recorded % of stocks above long term averages would imply markets remain in good stead.