Stocks fueled by rate cut optimism: Tech & SMIDs lead, Oil and Gold react to Mid-East tensions

• Stocks continue to advance on a new rate cut narrative.

• Bonds rally, yields pull back.

• Tech and SMIDS benefit the most.

• Oil and Gold react to the ongoing conflict in the Mid-East.

• Try the Pasta and Peas.

It’s RISK ON again…. – stocks pushed higher (again)– fueled by the rate cut narrative yet (again) born out of that slightly weaker NFP report on Friday….and an ongoing busy week of earnings… So, after everyone had a chance to digest the latest NFP report over the weekend – stocks continued to advance……the Dow gaining 176 pts or 0.5%, the S&P up 53 pts or 1%, the Nasdaq up 193 pts or 1.2%, the Russell adding 25 pts or 1.2%, the Transports up 32 pts or 0.2% while the Equal Weight S&P gained 52 pts or 0.8%.

Flashback to the end of July 2023 – The S&P was up 22% ytd on the idea that at some point the FED was going to cut rates – just because they had been ‘too high for too long’ – but as summer became fall stocks came under pressure as the idea of a rate cut began to fade…..and they only came under more pressure as we entered the seasonally weaker month of October…..– the S&P which had sold off by 8% from the July high, rallied briefly  +4% in Mid- October only to get hit again – falling another 6% into the end of the month – all on the idea that rates we going to stay higher for longer….and no rate cut was in sight.

And then came November 2023……– JJ told us that some members of the FOMC saw the potential of lower rates in 2024 – he told us that they (those members – not the committee) saw 3 possible moves of 25 bps…what he did NOT say was that the FED WAS going to cut rates 3 times in 2024 – yet some industry experts heard that not only were we going to get 3 cuts, we were going to get as many as 7 cuts and they would begin in March and continue thru every FOMC meeting thereafter – something that was never said nor was ever supported by the data……..and stocks surged….rising 28% between end of October to beginning of April – all on the idea of that multiple rate cut story….and the rest is history.

Stocks rallied hard…. even though the data never supported it….…yet – they convinced themselves and everyone else that it was going to happen. And then – a couple of things happened – 1. We started to get warning signs – for 3 months in a row (Feb, March & April) – the m/m inflation reports – CPI, PPI and PCE all started to show that inflation was not only stickier but was starting to rear its ugly head once again and that caused all kinds of speculation about what the FED’s next move would be and 2. We were now in April – typically a weaker month – that also includes an FOMC meeting at the end of the month – speculation was running wild – cut or no cut, no cut or a hike?  What was the FED going to say????  The S&P declined by nearly 5% - again no surprise….and then came the blackout period.

Remember – the FED can’t say anything during the blackout period so they had Nicky T write an article (leak the story) for the WSJ laying it out very clearly – “The FED has the Stomach to Hold Rates Higher for Longer” – in this article, Nicky raised the idea of a possible hike and boom – stocks declined….the algo’s took on a ‘shoot first ask questions later’ mentality and boom – down we went…Tech & the SMIDS (Small and Mid-caps) – getting hit the hardest – of course they did – think most dependent on rates.

On Wednesday last week JJ made it very clear that while the next move for rates may not be UP, (even though we have seen inflation tick higher for the past 3 months now)  there was NO plan to cut rates either….We needed to get used to 5.25% rates…(which btw are historically normal) – Period. The best we could hope for was a December cut or an early 2025 cut….and it was settled – so stop the whining….and investors and traders breathed a sigh of relief.

Ok- great… and then we got a slightly softer NFP survey on Friday….we created fewer jobs, unemployment ticked up to 3.9%, and wages grew less than expected….so what do they do – they give new life to the multiple rate cut story – as if JJ never said anything….….and stocks take off – suddenly July is back on the table and if not then certainly by September – just weeks ahead of the Presidential election……Stocks are up 2.3% in two trading days….taking everything with it…All sectors driven higher…..Tech and SMIDS benefitting the most (of course they are – most sensitive to rates)…..- XLK up 3.7%, IWM (smids etf) +2.3%, IJJ (S&P midcap 400 value) +2%,  NVDA +7.3%, SMCI +9%,  SEMI’S -SOXX +4.3%, Disruptive Tech - ARKK + 4.3%, Communications – XLC +2.4%, AI + 7%,  Expanded Tech Software – IGV + 2.6% and the list goes on.

The S&P pierced it’s trendline at 5131 (which should have been resistance) with no problem…. rallied to end the day at 5180 – leaving us 80 pts or 1.5% below the all-time high of 5262…. Now this is KEY…. why?  Because technicians view this ‘breakout’ as very bullish…..couple that in with the solid earnings season and the latest ‘softer NFP’ report and you have the ingredients to drive optimism even further fueling the ongoing rate cut narrative……But before you go popping the champagne – understand that while this move was impressive – it happened on below average trading volume…..which is NOT so impressive – Capisce?  When you have an advance like this but do not have the supporting volume – it tends to question the sustainability of the advance…but let’s not worry about that right now.

Now that being said – all 11 sectors ended the day higher…Communications – XLC up 1.4%, Financials – XLF + 1.3%, Tech – XLK + 1.2%, Industrials – XLI + 1%, Energy – XLE + 0.8%, Basic Materials – XLB + 0.6%  Utilities – XLU + 0.5%, Healthcare – XLV + 0.4%, Consumer Staples – XLP + 0.1% while Real Estate – XLRE ended the day flat.

Further down the line – we saw strength in Homebuilders – XHB +1.6%, Retail – XRT + 1.2%, Airlines – JETS +2.6%, Cyber – CIBR + 1.3%, Aerospace and Defense – XAR + 1.6%, Exploration & Gas + 1.25%, the Growth Trade – SPYG + 1.4% while the value trade SPYV rose 0.5%.  (Understand that the growth trade is up 12.5% ytd while the value trade is ahead by 4.5% ytd).

What didn’t work?  Well the contra trades were all lower, (DOG, PSQ, SH, VIXY, SPXS…),  the VIX (fear index) was lower -  all as stocks went higher, and that makes sense….they are – as I pointed out – CONTRA trades….They run ‘contra’ to the trend – so when the trend is up – those trades go down, when the trend goes down, those trades go up. It’s not rocket science.

Bonds also rallied hard on this renewed narrative – the TLT + 1.4% TLH + 1.2% while the AGG rose 0.6%. in the last 2 days.  The 2 yr. yield is now 4.82%, (down from 5.03%) the 10 yr. yield is now 4.48%. (down from 4.68%). shorter duration 3 month and 6-month bills have come in – and are now yielding 5.21% and 5.12% respectively on an annualized basis – down from 5.4% and 5.35% respectively.  And this is all because the rate cut cult has once again convinced themselves that JJ is bluffing….  Now – let’s see what next week’s CPI and PPI have to say…will they rise m/m for the 4th month in a row or not?  If they do – then expect this advance and the rate cut narrative to go ‘POOF” (again) and if they don’t – then expect the markets to breathe a sigh of relief…. Oh, it is a tangled web we weave.

Oil rose by 0.75% to end the day at $78.70…..Frist the Saudi’s raised the price of crude to Asia and then reminded us that they plan on keeping the current production cuts in place for the rest of us in order to help stabilize oil at higher prices (think $80+)  and secondly, the mid-east ‘ceasefire’ conversation remains confused and unresolved….….Hamas telling everyone that they ‘accepted the ceasefire’ negotiated by Egypt and Qatar as they attempt to put public relations pressure on the Jewish state… while Israel says ‘No Deal’ – Not happening….the Egyptians apparently changed the original proposal causing Israel to say ‘Slow down Big boy, not so fast’…. – and so – the tension builds as the world awaits the next move – Israel telling the Palestinians to get out of the way…Surrounding Arab countries refuse to take them in….……This morning’s WSJ lays it out.

“Israel Strikes Targets in Rafah, Calling Hamas Plan Deficient” – the news is that they were very targeted strikes to help take control of the Gaza side of the Rafah crossing.

Expect to hear more on this story as day turns to night in the mid-east and night turns today in the West…and oil edges higher.

Gold continues to thrash around…bouncing between $2300/$2350….one day it’s about rates the next day its about the Mid-east conflict, the next day it’s the Russia/Ukraine war and then finally it’s about how emerging market central banks can’t get enough….The 5 biggest emerging markets – Brazil, India, China, Russia and South Africa – each hold about 6% of gold reserves – which is half of what the developed world owns….and so – analysts at Goldman suggest that there is plenty of demand for gold by these banks, so, if you’re looking for a significant pullback – don’t hold your breath…..This morning – gold is trading at $2325 as traders anxiously await more news out of Rafah.

This morning – US futures are churning….as the rate cut optimism continues to build….and remember – yesterday I told you that the ECB is sending very strong hints that they expect to cut rates in June – but not because ECB President Christine Lagarde said so, because other members of the governing council said so….and if the ECB cuts – does that put pressure on the FED to cut?   

Yesterday Richmond Fed President Tommy Barkin told us that the job is not done yet and that he expects high interest rates to ‘eventually’ cool US inflation to the 2% target – that doesn’t sound like a rate cut is in the works to me, and today we will get Minneapolis’s Neely Kashkari – who is also a supporter of higher for longer…Will his comments change the narrative?  At the moment it feels….’iffy’.  Dow futures are up 80, S&P’s up 2, Nasdaq down 25 and the Russell is up 5. 

There is no eco data, but there are some earnings due today…. ROK, DDOG, DIS, DUK, along with about 15 more…

European markets are all up…. UBS +8%, UniCredit up 3.25% and they are leading the way in the financials.  We wait for BP out of the UK. There is no eco data to speak of. Markets across the region are up between 0.5% - 1%.  

The S&P closed at 5180 – up 177 pts…… what was resistance at 5131 is now support – which doesn’t mean we can’t slice thru it on the way down, just like we did on the way up….it just means that might provide some support if we test it….On the upside – all eyes are on 5262- which is the all time high….so it appears that we are in the 5131/5262 trading range and while the bias feels like it’s up – don’t be so sure….remember – the action yesterday was on weak volumes…and that speaks to sustainability….Which is why I continue to advocate for ‘the plan’. Create on, build one and stick to it…Call me to discuss.  212-381-6194.

Pasta and peas – A peasant dish that is so good

This is one of my favorite’s pasta dishes ever…. It is simple to make and reminds me of being a kid (all over again). 

For this you need – 1 bag of frozen peas, 1 lb. of orecchiette pasta (or shells or elbows), 1 large onion, olive oil and fresh grated Parmegiana.  You can make dinner for 4 for $12 (max).

Bring a pot of salted water to a rolling boil.

In a sauté pan – add olive oil and the onions. Sauté for 10 mins to allow the onions to soften.  Now add the peas…stir to coat well and then turn heat to med low…cover and let cook. Season with s&p.

After 20 mins – cook the pasta – strain – keeping a mugful of the pasta water.  Mix with the peas – add a ladle of the water and a handful of the cheese – Bam – serve immediately – YUM!