It's All Bullishit
This week the FOMC cut interest rates by .5% which is the most they've cut since the pandemic meltdown in March 2020 and before that the Lehman event in September 2008. One year t-bill rates are imploding at recession speed. Stocks are making new all time highs.
Why? Because it's all bullish.
Last night the BOJ held rates steady following their surprise rate increase in July which imploded global markets. Consider that at the last FOMC/BOJ the Fed held rates steady and the BOJ raised by .25% for a .25% yield differential which imploded the carry trade. This time around the BOJ held rates steady and the Fed CUT by .5% for a .5% yield differential and this is now bullish?
Sure.
As it was in August, we won't know until next week the full effects of this week's events. Today is a gargantuan quarterly options expiration which has so far kept the market in a tight range. Yesterday the S&P 500 broke that range to the upside, but the trillion dollar question is was it a breakout or a fake out?
"Since 1990, the S&P 500 has slumped 1.1% on average the week after September options expiration, according to the Stock Trader’s Almanac. There have only been four exceptions where stocks saw across the board gains"
Despite this week's melt-up, vol has remained bid as traders reach for upside risk.
Despite the S&P 500 and Dow at new all time highs, the Nasdaq has been left behind which is what happened at the 2022 market top. The Nasdaq peaked first and the Dow peaked six weeks later.
Here we see the Mag7 mega cap Tech stocks have a symmetrical three wave pattern which suggests that momentum has run out of gas.
We have been continuously told that rate cuts benefit small cap stocks the most. Clearly from the chart above rate cuts are not benefiting the mega caps. Which begs the question then why are small caps not making new all time highs? This has been the longest win streak for small cap stocks in six years and yet they now have the same topping pattern they had in 2022:
Revisiting my last blog post regarding real estate, it's an article of faith that lower interest rates benefit homebuilders, and here we see those stocks are now vertical.
Carry traders went back to RISK ON this week via $USDJPY however I would point out that there is now a chasmic divergence between the overall trend towards RISK OFF in currency markets versus global stocks. The carry trade is clearly following U.S. interest rates lower.
As we see below, U.S. interest rates were rising in 2022 which supported risk markets, now they will accelerate the collapse via the imploding carry trade.
In summary, the low vol stocks that have led this second half rally are now running out of gas and no longer confirming the market high. Meanwhile, the dollar is clinging to final support.
All of which portends what I call global dollar margin call.
