Too Far Too Fast? Stocks, Bonds UP, Dollar Down, Oil Set to Recover?/Try the Stracciatella Soup

Kenny PolcariUncategorized

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Things you need to know.

–        It was another winning week $23 billion moves into stocks.

–        Oil rallies AFTER the Saudi’s /OPEC+ hint of more production cuts!

–        The dollar index gives back 100% of 2023 gains – as the narrative turns from rate hikes turn to rate cuts.

–        Are we now in ‘overbought’ territory – have the markets gone too far too fast?

–        Try the Stracciatella Soup

Stocks moved further into the century – with the S&P up 6 pts to end the day at 4514, the Dow up 2 pts, the Nadaq added 12 pts, the Russell – the biggest winner – tacked on 25 pts or 1.4%, while the Transports added 118 pts or 0.8% and the move added to the $2.7 trillion rally that has defined the month of November – the move tied directly to these 3 bets:  Rates have peaked, the FED is now officially in pause mode and the country will avoid a recession. The dollar, which has rallied strongly on the idea that the FED would not stop the hiking cycle has now given back this year’s move as calls for 2024 rate CUTS intensify.  The dollar fell 0.5% to end the day at $103.81- just 29 cts above where it closed on December 30th, 2022 – the final trading day of the year.   

Oil which has been under pressure after the October surge has now broken thru all the trendlines going into free fall mode as oil analysts suggest that the US and global economy were about to enter the ‘danger zone,’ that global demand was ‘waning – a story that made NO sense- Why?  Because the US is producing at RECORD levels, China and India are importing at RECORD levels, OPEC + and the EIA raised growth levels for this year and next which doesn’t suggest ‘waning demand’ to me – in fact quite the opposite…… But they succeeded in convincing everyone that oil was over bought and as the price of oil broke support trendlines, that only empowered the algo’s to go into overdrive – buyers stepped aside – sending the price lower.  The latest break coming last Thursday – when it broke the final trendline sending oil tumbling into a free fall – ending Thursday at $72.90- down 17% from the October Israeli/Hamas high. 

On Friday morning as I pointed this all out and said that I was not in the ‘weaker demand camp’  – I also said that while the chart (technically) suggests we could see oil trade into the $68/$72 range – DO NOT discount how the Saudi’s/OPEC+ will react…In fact – I said “don’t think the Saudi’s are just going to sit and take it…expect them to announce more production cuts….”. 

As the earth rotated around the sun on Friday – that is exactly what happened…. rumors began to swirl, and oil shot higher…rising $3 to end the day at $75.89.  Over the weekend – the Arab News – serving Saudi Arabia and the Middle East runs with this story –

  “Oil Updates – Crude Extends Gains as OPEC+ to Mull Deeper Cuts.” 

The story goes onto say that the decline in prices is raising expectations of extending and/or cutting supply in order to ‘shore up prices which have fallen for four weeks on easing concerns of Middle East supply disruption amid the Israel/Hamas conflict.’  And BANG…there it is….and this morning oil is up another 30 cts at $76.20/barrel – kissing the trendline – edging ever closer to their sweet spot that is somewhere between $80/$100 barrel.  

Additionally – you can point to the weaker dollar – remember the inverse relationship – dollar down, commodities up, dollar up commodities down (assuming there are NO other factors driving oil like war, or supply cuts, supply disruptions or production regulations).  Energy – as you might imagine was the biggest winner on the day – the XLE gaining 2.1%.  XOM + 2.5%, CVX + 2%, SU +4% & CVE +3.2%. 

Bond prices rose – after investors/traders and even the algo’s are betting that the FED will confirm that the hiking cycle is over…and that while rates may not be going up any longer, they are not set to go down anytime soon. 

 The TLT – 20 yr. bond etf gained 0.5%, while the TLH – 10-20 yr. bond etf gained 0.25% and that sent yields slightly lower.  This morning the 10 yr. is yielding 4.45%, the 2 yr. is yielding 4.89%. 30 yr. bonds yield 4.60% while 30 yr. mortgage rates are just below 8%.  The iShares AGG etf – tracks the Bloomberg AGG index – which tracks bonds within the total US investment grade universe including treasuries and corporates and MBS’s, ABS’s and CMBS’s rose by 0.2%

Gold, which bounced off of support at $1936 2 weeks ago –to trade back up to nearly $2000/oz is consolidating. This morning it is down $6 at $1978/oz…just hugging the long-term support trendline…. I suspect the next move is up as the dollar continues to weaken…. although a test of intermediate support at $1954 would not be a surprise if the narrative changes.

Now be careful – stocks have gone from ‘oversold’ in October to ‘overbought’ in November….and that suggests that we could/should see a bit of a breather….I think that both stocks and bonds have rallied to far to fast and the they are now pricing in a ‘perfect soft landing’ –and while we may have avoided a crash landing – there are still risks to inflation rearing its ugly head again…and so to that I will say – stay awake….this is not the time to go to sleep.

Last week was the 2nd biggest week of inflows into global stock funds with investors adding $23.5 billion…..funny thing is though, that much of this money came from the same people that ran for the exit doors in October – fearing that the bottom was falling out and that the FED was going to push rates higher still.  Which only further supports my argument that as a long-term investor you stick to the plan…. eliminate the noise and stay the course.  In fact – investors that had a plan and stuck to the plan and were buyers in October during the downdraft – will surely find themselves in a better position today.  Just sayin.’

Again, I will make the point that ‘we’ must get used to 5% fed fund rates for the time being. And like I said last week – 5% rates are not ‘historically’ high – they are actually ‘normal’….and here’s a secret – the markets can and do function fairly well with normal rates….in fact – what normal rates do is make everyone more responsible. They put the pressure on listed companies to perform at peak…. Why?  Because now there are alternatives…. if companies miss targets and get fat & lethargic, investors can and do take their money and go elsewhere…. So, 5% rates force everyone to focus and that is good….8% rates would force them focus even more!

There was more mixed FED commentary last week – Vice Chair of Supervision – Mikey Barr said that the FED is ‘likely at or near the end of the tightening campaign’ while San Fran’s Mary Daley said, ‘policymakers aren’t certain inflation is on their 2% target’.  (That is if you even take Mary at her word – recall – the 2023 banking crisis started in San Fran under her watch – she was completely oblivious to the disaster brewing on her doorstep – so you decide what FED officials you think have their finger on the pulse.) In any event – while I now agree that the FED will most likely not raise rates again – I am in the camp that investors who are betting on rate cuts in early 2024 are barking up the wrong tree…. Not happening…. Remember – 5% rates are normal…need I say it again?

This morning – US futures are UP…. Dow +40, the S&P’s up 6, the Nasdaq UP 31 while the Russell is flat.  It is a holiday shortened week….Markets closed on Thursday and only opened half a day on Friday…..and while this week is usually a win for stocks – we have seen a dramatic move in the past 2 weeks….so my gut says not so fast…which doesn’t mean anything other than ‘not so fast’. 

We are due to get NVDA earnings and forward guidance tomorrow afternoon – so that could change my opinion!  NVDA is up 237% ytd….in a year that has been crazed about AI.  As you can imagine – they are expected to beat on all lines….and are expected to be bullish in their forward guidance commentary (the mkt is expecting this already – now it just depends by how much will they beat and how bullish they are…) – and don’t be surprised if we see the stock come under pressure after the report – even if they beat – the trader types will use it as a way to ring the register – the stock is up 20% off the September lows coming into this report – so ‘ching, ching’ is very possible.….  Remember though, there is this ‘cult mentality’ around NVDA, much the same way there is around TSLA.

Eco data – nothing today…. but tomorrow will bring us Existing Home Sales – which are expected to be down by 1.5%. The November FOMC mins are also due out tomorrow – but I do not expect that we will learn anything new. Wednesday – the biggest travel day of the year – will see Mortgage apps, Initial and Cont. Claims and Durable Goods.  Friday brings us both Manufacturing and Services PMI’s.   

European market centers are mixed…. France and Spain are the only two that are higher…. while the rest of them are all a bit lower….by about 0.2%.  German Pharma – BAYER is down nearly 20% after they announced the end of trials for their new anti-clotting drug…. That is taking the sector a bit lower. Inflation in the UK is down sharply and inflation in the Eurozone is down sharply…and that raises the odds that both the ECB and BoE will also go into official pause mode now as well.

The S&P closed at 4514 up 6 pts…. And this morning it looks like we are going to churn and digest the recent push.  The September high of 4530 is the next milestone – a push up and through that will definitely cause a run to the 2023 high of 4608 just because it will ignite the algo’s and that will send stocks higher.  4407 now represents support –so it appears that we are in this 4407/4608 trading range… until we aren’t….

Take good care.

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

Disclosure: The content provided in this material is designed for educational and informational purposes only, and it is important to note that it does not constitute personalized recommendations. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment.  The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kenny Polcari or SlateStone Wealth.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions, which may not necessarily align with our firm’s standpoint.

While considerable effort has been invested to ensure the accuracy and dependability of the information presented, we must clarify that we cannot guarantee the accuracy of third-party information. Our usual sources for third-party data include channels such as Bloomberg.

Kenny Polcari is the Chief Market Strategist for SlateStone Wealth.  Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.

Chef hat, knife, and fork icon

Stracciatella Soup

Here is another good idea for a Thanksgiving starter – or for a cold winter night. Stracciatella soup is simple. You start with the homemade chicken broth – straining any of the veggies that you cooked with it – leaving only the broth. Now if you don’t have any homemade chicken soup – then go out and buy a large can of College Inn – low sodium – chicken broth.

Now you need – the broth- enough for 6 bowls, 2 eggs, fresh grated parmigiana cheese, raw spinach, a couple of fresh basil leaves rough chopped and some Italian parsley. (optional)

Heat up the broth – while that is happening – crack the two eggs and whisk. Now add in one handful of cheese, the basil, and some parsley. Turn the heat down to low – wait for the broth to stop boiling… now stir the broth with a FORK and at the same time – slowly add in the egg and cheese mixture… continue stirring so that you form “strands” of eggs – no more than 1 min… now toss in two handfuls of the spinach – check for seasoning – adjust if necessary and then serve immediately. Always have more cheese on the table for your guests. Mmmmm – so good.

Buon Appetito