What a difference a day makes. As we discussed on Tuesday, the slide in small caps, financials, energy, treasury yields and materials looked on the charts as too-far, too-fast. In the meantime, as rates fell tech rose to overbought level 3.
Yesterday, (Thursday) investors retreated en-masse from risky assets (equities) into treasury bonds, pushing bond prices up and yields down. This was a reversal from just a week earlier when equities were setting records.
After a broad selloff across US markets, investors look for possible causes:
a) increased concern about labor shortages and supply chain delays,
b) OPEC+ failed to agree on increasing production, which caused concern about a price war, lowering oil prices,
c) some evidence that the rate of economic growth is slowing,
d) the rapid spread of the Delta variant (and subsequent variants) of the Covid-19 virus, especially among the unvaccinated (about 40% of US population) in certain demographic groups and regions.
e) talk of Fed talking about their timeline for stimulus efforts,
f) thin trading (lower volume) as part of holiday week and summer vacations.
g) concern of inflation: the numbers that matter to people are gasoline and food prices which they see and need every day - to them talking about CPI and PPI is meaningless
h) Tropical storm Elsa hitting the northeast causing traders to leave early.
But why yesterday? Something spooked the market with a lot of sell orders and with buyers who stepped back or were not there. We know that major lows occur when investors panic. As stock prices fall, stops are hit and become market orders, adding to the selling. We also know that algorithmic trading firms can trigger broad moves in either direction.
In any event, the market action today suggests that the 10 and 30yr US Treasury yields may be bottoming. Yields gapped up today, so we expect some backing and filling in the next few days. At that point we can be more confidant that trends have reversed, or not. Nevertheless, the strong gap up suggests that the downside correction may have ended.
Sectors that are benefiting today from higher yields include Financials, Small Caps, Energy, Basic Materials are all up over 2%. Banks, Metals and Mining rose over 4%. Banks, Metals and Mining were oversold. Lot of short covering and bottom buying.