Treasury Yields Challenge S&P Divy Yield; Stocks Suffer – Try the Sole Meuniere

Kenny Polcari Uncategorized

Things you need to know.

  • Yields surged up and thru 1.5% challenging the S&P 500 Dividend Yield
  • Eco data continues to exceed expectations.
  • Nasdaq and Russell get hit hard, S&P and Dow not so much.
  • Futures lower again – Will the S&P now pierce key trendline support.
  • Oil pulls back a bit and Bitcoin takes a breath.
  • Try the Sole Meuniere

Stocks ‘surged’ LOWER!  10 yr. yields ‘surged’ HIGHER, the VIX surged higher and the  Eco data ‘exceeded’ expectations (in a sense – that is a surge too!) and the world turns….Selling in the tech sector – the Nasdaq losing 478 pts or 3.52% caused a me too selloff in the broader market -the Dow Industrials losing 550 pts or 1.75%, the Dow Transports falling 258 pts or 1.9%,  the S&P lost 96 pts or 2.45%,  while the Russell actually was the worst performer falling 84 pts or 3.7%….the weakness started early – actually in the pre-market and then spilled over into the regular trading session….Talk of the latest Powell testimony being drowned out by rising 10 yr. yields – in fact – they rose so fast – that they pierced 1.5% early on before rising as high as 1.531% and this sent stocks  the tech stocks into a bit of a freefall…Investors rushing to hit the SELL button trying to be the ‘first one out the door’ – leaving names like Apple, Google, Netflix, Amazon, FB, Microsoft all down more than 2% – and Tesla – one of the most popular ‘growth’ names getting slammed in a one day sell off exceeding 8%…..as investors attempt to lock in some of the most recent gains.

Just fyi – before you get your panties in a bunch….the Dow is still up 2.7%, the S&P is up 2%, the Nasdaq is up 1.8% and the Russell is still up 11.4% ytd…..and from a sell off perspective – the Dow is only down 1% off the high, the S&P is down 3%, the Nasdaq is down 7.8% and the Russell is down 5.2% off their most recent highs and this is in line with my expectation of a 7% – 9%  pullback in the broader market……Yes, we have seen it in the Nasdaq, but we have not seen it in the broader market – so I’m sticking with my call…and that may mean that the Nasdaq actually has a bigger correction – falling more than 10% -and you know what?  That is ok – because it has so outperformed for a while now….

But why is anyone surprised?  While we have been expecting bonds to fall and yields to rise – in a sign of the ever-improving economy…. I have been warning about the pace of those increases and the level that would cause investors to begin to re-think valuations…. there has been a range of public opinion……and it has been the topic du jour for weeks now.  I have been saying that I thought at 1.5% – stocks would begin to experience some headwinds while 2% would represent more of a wall……and that if we saw markets back of in the 7% -9% range, no one should be surprised at all.  There were others that said they will not be concerned until the 10 yr. hits 3% – and to that I said, ‘good luck with that’.

And so it begins…..yields surged up at a pace that no one expected (which is at the heart of the issue), and when that happens;  once it starts to move – it gains momentum because investors HAVE BEEN on the edge – everyone waiting for someone to pull the trigger so that they have cover to hit the SELL button– right, because they don’t want to be the first one to run out the door, for fear of making a mistake, but they don’t want to be the last one either for fear of being called lax……or asleep at the wheel…..and that is what we saw…in any event – remember – in order for the markets to work, there has to be both buyers and sellers…and so while some are finding a reason to sell, others are finding a reason to buy….albeit at more attractive prices….and so it goes…

Yesterday, I started my comments with a ‘theme’ – exceeding expectations…and again yesterday we saw that slew of macro data did just that – EXCEED expectations…. Durable goods coming at +3.4% well above the expected 1.1%, Ex transports at 1.4% double the expectation, Capital Goods Shipped rose by 2.1% vs. the +0.6% expectation, Initial Jobless claims and continuing claims fell more than expected GDP at 4.1% was an improvement over its prior release but just 0.1% below what analysts expected.

Today will see another bunch of macro data report…. Retail Inventories of +0.5%, Personal Income and Personal Spending of +9.5% and +2.5% respectively…. Chicago area PMI – expected to come in at 61 and inflation forecasts by the U of Michigan 1 yr. at 3.3% while the 5 – 10 yr. expectation is 2.7%…. again, I think this data point is useless -but you can make your own decision.

US futures were lower overnight and remain lower at 6:30 am.  10 yr. yields are pulling back and are now below 1.5% yet markets remain a bit anxious….…. Dow futures are down 141 pts while the S&P’s is down 10 pts, , the Nasdaq is down 45 pts and the Russell is down 10 pt.….After a move like yesterday – we can expect investors to try and find some stability….but don’t get too comfortable – in fact remain a bit uncomfortable, because it keeps you sharper….

Yesterday we saw the VIX advance by 35% – to end the day at 27.93 a decent spike but still below the late January move….It is surged up and thru all 3 trendlines and most likely has room to move before this latest round of angst subsides…In any event – there is no reason to panic – the move in  yields has to and will happen, stocks have to and will re-price based on these moves. Period the end.  Again I expect yields to go to 2% before this is over – and that will prove to be more of a headwind  – what you need to understand is the pace at which we get there will determine the depth of any re-pricing…..and just to confirm  – a re-pricing would not be a super negative story at all….it will shake a branches a bit and some will fall out, but in the end, it will leave the markets and investors in a better position.

Again, the worst performers yesterday have been the best performers recently…. Tech, Energy, Communications, Retail and Financials.  Look – yesterday’s action put the 10 yr. yield above the S&P’s dividend yield – capisce?  That now poses a bit of a challenge for some investors as equities are now considered the ‘riskier asset’.  Prior to this move – bonds were riskier because they offered sub-par yields – now there is a conversation to have….and that is what is causing yields to surge this fast and so you ask Was this just a one off?  I do not think so, I think we will see more of this in the months ahead, which is why I say – no need to chase.     Focus on the recovery names, focus on large cap multi-nationals, focus on parts of the tech space that are not the FANG names…. but most of all, do not throw the baby out with the bathwater.

I still like financials, energy, consumer staples (not sexy but a safer play if you are nervous).  Tech is always in play – but go shopping, look for other opportunities in the space – think AI, Cybersecurity, think Internet of things, think companies that disrupt the status quo….

The dollar index (DXY) traded a bit lower yesterday and is now attempting to rally…. piercing up and thru short-term resistance at 90.383 currently trading at 90.565.  Bond yields are coming in – now at 1.475% down from 1.513% and that is helping the dollar tone.

Oil is down 50 cts at $63.04.  No story there…just a bit of consolidation.

European markets are under pressure…. following both the US and the Asian market selloff overnight…… Investors there are attempting to reconcile the latest move in US yields. No eco data today but a handful of earnings.  At 7 am – the FTSE -1.3%, CAC 40 -1.06%, DAX -0.78%, EUROSTOXX -1.10%, SPAIN -0.51% and ITALY -1.09%.

Bitcoin – is -1700 at $46,425.

The S&P closed at 3829 – once again trading as low as 3814 before finding support…and that is – for all intents and purposes – testing trendline support at 3805 again – the second time in less than a week. This morning with futures looking lower again and if nothing changes – the S&P can be expected to pierce that key technical support level and if it does – we could expect to see some support at the 3775 level…. but it is Friday, and the markets are a bit antsy – and if we do not see a bounce this morning – then I suspect that the markets will push lower to end the week.

Look – the rising yield is not a reason to hit the sell button – yes, some of the high growth names will come under pressure but guess what – that is the opportunity so do your homework and pull out your shopping list.  We remain in the 3790/4040 channel.    As always, I would advise you to stick to the plan, trim where necessary and put money to work in some of the underperformers….

Text INVEST to 21000 to get my digital business card – give me a call if you want to discuss what I can do for you.

Take Good Care,

Chief Market Strategist, Consultant
kpolcari@slatestone.com

Sole Meuniere

You will need:  Dover sole (or lemon sole) flour, s&p, butter/oil, lemon, parsley, and capers (optional).

Rinse and pat dry the filets – Combine flour, salt, and pepper – dredge the filets and set aside.

In a skillet over medium-low heat, melt the butter and add a splash of Olive oil to prevent the butter from burning.   As soon as the butter stops foaming place the filets in the pan – being sure not to overcrowd the pan (maybe 3 fillets at a time). Cook for 2 – 3 mins then turn and cook for an additional 2 – 3 mins depending on thickness of the filet.  Only turn once during cooking.

Place the filet on a warmed platter and melt a bit more butter in the skillet – turn off the heat so that you do not burn the butter…. squeeze the fresh lemon into the butter – add capers if you want and stir together.
When completed – pour this sauce over the filets – sprinkle with fresh parsley and serve immediately.   Serve this dish with French cut green beans – that are first blanched in salted water, then shocked in a cold bath then quickly sautéed in a bit of butter and s&p.  Easy, quick, and good for you.

Buon Appetito.