Stocks Rally On November 23, 2022 Despite Hawkish Fed Minutes Calling For Rates

By:

Portfolio Manager with Interactive Advisors, CEO of Mott Capital Management

STOCKS – CAT, IBM

MACRO – SPY, VIX, VVIX, DIA

Stocks finished the day higher, with the S&P 500 rising by about 60 bps. The Fed minutes were not dovish, not if you got the point of them, which was that the terminal rate would be higher than previously thought. The pace of the hike probably doesn’t matter much because if the Fed wants rates to be at 5%, that is likely where they will be in early 2023. A 50-bps rate hike would get us 4.5% by December and another 50 by January. The question is whether the rate will continue to push higher from there and what that means for Treasury rates.

If the Fed is going to leave rates at 5% for the next year, then over time, I would think the 2-year rate would rise to around that level to reflect that expectation. Whether the Fed leaves rates at 5% for all of 2023 isn’t the question. The question is if the Fed can make the market believe it will.

The need is to keep financial conditions easing, and I suspect they are not ready to let that happen.

S&P 500 (SPY)

The S&P 500 closed at the highs seen on November 15, and I don’t think that is enough to change anything at this point. It still looks like a corrective wave, which looks like a double-zigzag. That is hitting up against a 61.8% retracement of the August highs and a 78.6% extension of the Oct lows.

S&P 500

VVIX

Additionally, the VVIX had a big move higher today for the second day in a row, and while two days in a row are not a trend, it is interesting as the VIX index declines.

VIX

VIX/VVIX

The VIX to VVIX ratio fell sharply today and below its lower Bollinger band. This year, every time that happened, it coincided with the S&P 500 topping. It is an observation.

VIX VVIX

Additionally, the VIX spot minus the VIX 3-month generic futures contract fell to -5.1 today. That also has been historically associated with market tops this year as well.

SKE

SKE

SKEW

Additionally, we saw the SKEW index pop higher, indicating that traders are suddenly looking for tail risk protection.

SKEW

Again, these aren’t the makings of a market getting ready to move significantly higher. These remain markings of a market starting to position itself for higher volatility. Will any of these observations call the exact moment of a top no? But they can tell us what is happening beneath the surface and what traders think about and do. After all, the market likes to think about the second-derivative trade, and the second derivative of selling volatility is buying volatility. Plus, this is a holiday week, and the de facto trade into a holiday is to sell volatility as time value decays.

IBM (IBM)

IBM finished the day lower, one of the stocks that helped push the Dow’s outperformance and remains worth watching. The stock rose today to the highest level price since February 2020. It is kind of ironic, in a way. As most stocks fall to their February 2020 levels, IBM is still recovering from the covid sell-off.

IBM

Caterpillar (CAT)

Caterpillar also seems interesting, as its RSI is trending lower and has formed what could be a short-term double top. The stock hit resistance again today at its April highs. Furthermore, it is not so much to figure out where this is going, but what signals it is sending.

Caterpillar

QQQ to DIA

What is interesting is when you do a ratio of the QQQ to DIA. It is evident when looking at this ratio that money is exiting the higher-growth parts of the market and going back into the more traditional parts. The parts of the market were left behind over the past two years. Of course, the question is where it stops and if this is just a return to the longer-term trend line.

Otherwise, this may be some proxy trade on bond yields. Not sure.

QQQ to DIA

Originally Posted on 23rd November – Stocks Rally On November 23, 2022 Despite Hawkish Fed Minutes Calling For Rates

Disclosure: Mott Capital Management

Mott Capital Management is the portfolio manager for one portfolio offered by Interactive Advisors. Interactive Advisors clients do not invest directly with the Portfolio Managers like Mott Capital Management, and the Managers do not have discretionary trading authority over Interactive Advisors client accounts. The Portfolio Managers on the Interactive Advisors platform simply license their trade data to Interactive Advisors, which then allows its clients to have the same strategy and trading decisions mirrored in their accounts if the Portfolio is in line with their risk score. Portfolio Managers like Mott Capital Management implement their trading philosophy and strategy without knowing the identity of Interactive Advisors’ clients or taking into account these clients’ individualized circumstances.

Mott Capital Management has entered into a Portfolio Manager License Agreement with Interactive Advisors pursuant to which it provides trading data IA uses to offer a portfolio to its investment advisory clients.  Mott Capital Management is not affiliated with any entities in the Interactive Brokers Group.  

Interactive Advisors is an affiliate of Interactive Brokers LLC.

Pursuant to the Investment Management Agreement between Interactive Advisors and its clients, all brokerage transactions occur through Interactive Brokers LLC, an affiliate of Interactive Advisors. The use of an affiliate for brokerage services represents a potential conflict of interest as Interactive Brokers LLC is paid a commission on trades executed on behalf of Interactive Advisors. Interactive Brokers LLC does not consider this conflict material as it does not sell, solicit, recommend, trade against or otherwise attempt to induce Interactive Advisors to place any orders in any products. Interactive Advisors does not offer services through any other broker-dealer.  All trading by Interactive Advisors is self-directed. Interactive Advisors clients acknowledge this potential conflict of interest and authorize Interactive Advisors to execute transactions through Interactive Brokers LLC when they open an Interactive Advisors account. Clients should consider the commissions and other expenses, execution, clearance, and settlement capabilities of Interactive Brokers LLC as a factor in their decision to invest in an Interactive Advisors Portfolio. Interactive Advisors believes it satisfies its best execution obligation by trading its clients’ trades through Interactive Brokers LLC. While there can be no assurance that it will in fact achieve best execution, Interactive Advisors does periodically monitor the execution quality of transactions to ensure that clients receive the best overall trade execution pursuant to regulatory requirements.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Mott Capital Management and is being posted with permission from Mott Capital Management. The views expressed in this material are solely those of the author and/or Mott Capital Management and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.