No Surprise in Mechanical Rebound Effort

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The major indices suffered large losses yesterday that were pinned on a jump in Treasury yields and a violation of technical support at the 50-day moving average for the S&P 500 and Nasdaq Composite.

Accordingly, it should be little surprise to hear that the futures market is signaling a rebound effort at today’s open when one also takes into account that this market has been conditioned to buy on large dips and also when the major indices slip below support at their 50-day moving average.

It also shouldn’t be a surprise when taking into account that Treasury yields are acting better today — so far anyway.

The 10-yr note yield dipped below 1.50% a few hours ago, but it has moved back to 1.52%, leaving it slightly lower from yesterday’s settlement. That’s not much, but in the context of a stock market that has grown skittish over the rapid rate of change in Treasury yields, it is something that is good enough to fuel buy-the-dip interest.

Currently, the S&P 500 futures are up 18 points and are trading 0.7% above fair value, the Nasdaq 100 futures are up 88 points and are trading 0.7% above fair value, and the Dow Jones Industrial Average futures are up 104 points and are trading 0.7% above fair value.

It jumps out that the futures for the major indices are all trading above fair value by a like amount. That suggests to us that there is a bit of a mechanical  — or one might even call it algorithmic — aspect to the market’s positive disposition this morning. 

In other words, it is a reflexive bid, which also means that the prospect of an early challenge to the buying interest is apt to be seen. Market participants will presumably want to test the conviction of the buy-the-dip crowd to see if there is more to the mechanical rebound trade than meets the cynical eye.

The behavior of the Treasury market should be a guiding light in that respect along with the behavior of the mega-cap stocks and the tenor of the headlines out of Washington DC.

At the moment, there is a little something for the market to hang its hat on with respect to DC dealings. Reports this morning suggest the Democrats are going to return with a clean continuing resolution (i.e. no debt ceiling increase provision attached to it) that will provide government funding through December 3.

That is expected to pass when it comes to a vote; however, the matter of raising the debt ceiling and reaching an agreement to pass the infrastructure bills remain open-ended and contentious issues.

Another open-ended issue is the number of companies that will be warning in coming weeks about supply chain pressures keeping their earnings and sales prospects from being all they can be. Micron (MU) and Sherwin-Williams (SHW) were the latest companies to add their name to a growing list of companies bemoaning supply chain limitations as a factor in disappointing guidance. MU is down 3.6% and SHW is down 2.2% in pre-market trading.

Gains in Boeing (BA), Eli Lilly (LLY), and Occidental Petroleum (OXY) following analyst upgrades have helped offset the weakness of those stocks along with modest gains in Apple (AAPL)Microsoft (MSFT)Alphabet (GOOG)Facebook (FB), and Amazon.com (AMZN) that fit neatly in the context of a mechanically-driven rebound effort.

Originally Posted on September 29, 2021 – No Surprise in Mechanical Rebound Effort

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