Bond Traders Don’t Believe the Fed – Rising Yields Continue To Weigh On the Market

March 18, 2021

Posted 9:30 AM ET – Yesterday the Fed gave traders every reassurance that it would not raise rates until 2023. The initial reaction was market friendly and stocks rallied on the news. Unfortunately, that rally was short-lived and the S&P 500 is giving all of those gains back this morning. Bonds continue to drop overnight and they are not giving the FOMC statement much credence.

Economic growth projections by the Fed were raised to 6.5% this year. They believe that inflation will hit 2.4% this year, but that the spike will be temporary. Supply disruptions will lead to higher prices. Their forecast for inflation in 2022 is 2% and that is within their target. This tells me that they will not tighten just because prices are moving higher. This helps to explain why short term yields are jumping.

I still believe that the bigger story is time. Stock valuations are rich and profits will surge in Q2. When that happens valuations will normalize and the market will be able to move higher and we will be able to gauge the magnitude of the economic rebound. Until then, buyers and sellers are paired off and the market is trapped in a range.

I do believe that the bid is growing as states reopen and some of the $1.9 trillion stimulus money will find its way into stocks. We are closer to a breakout than we are to a drop.

Swing traders should remain long SPY and you should look for opportunities to sell out of the money bullish put spreads. Bond prices will continue to drop and the market will wait for signs of support. I will be watching for a capitulation low. As long as TLT is dropping, avoid the tech sector and focus on cyclical stocks for your bullish put spreads. When bonds bounce and there is follow through you can start selling bullish put spreads in tech.

Day traders should watch for support at yesterday’s low. The selling pressure this morning has been brisk and it may take a while for us to form support. Quadruple witching could have an impact if directional momentum is established. Program trading kicks in as positions are “rolled”. This could happen on a sustained decline or it could happen off of a snapback bounce early in the day. Go with the flow. If the market is making a new low for the day after two hours, favor the short side. If the market is making a new high after two hours, favor the long side. I believe that we will see excellent two-sided action and a nice intraday range.

You might think I’m joking, but I’m not. Watch for trading activity to decline more than normal in the middle of the day. Traders love to watch March Madness and I see this every year during the first two days or the tournament

Support is at the low from yesterday and resistance is at the high from yesterday.
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