The Standard & Poor’s 500 was basically flat with a loss of just 0.04% as of the close today. If you want ACTION!!! you have to look elsewhere: To the NASDAQ Composite, which was up 0.87% as of the close and to the small cap Russell 2000, which was down 1.18% at the finish.
The rhetoric was the same after today’s meeting of the Federal Reserve’s Open Market Committee: “Inflation has risen, largely reflecting transitory factors.” But the Dot Plot that tracks projections by the committee’s 18 members told a very different story: There’s more reason to expect an earlier increase in interest rates than back in March.
As of the close on Monday, June 4, the major stock indexes were treading water waiting to here what, if anything, the Federal Reserve might say after the Wednesday meeting of its interest-rate-setting body, the Open Market Committee. (No one really expects the Fed to actually do anything about the monthly schedule for bond purchases or about changing the benchmark interest rate now set at 0% to 0.25%.) The Standard & Poor’s 500 was up 0.18% but the Dow Jones Industrial Average was off 0.25%. The NASDAQ Composite was up 0.74% but the small cap Russell 2000 was lower by 0.54%.
I expect an end to the short-covering in the Treasury market ahead of Wednesday’s meeting of the Federal Reserve’s Open Market Committee. Short-covering in the Treasury market as bond traders unwound bets against Treasuries sent the yield on the benchmark 10-year Treasury note down 11 basis points this week. That’s the biggest weekly decline in a year. Yields on the 10-year Treasury hit 1.43% on Friday, a three-month low.
Yesterday the Standard & Poor’s 500 hit its first new all-time high since early May as investors and traders bought into the reassurance from the Federal Reserve that the 5% year over year increase in the Consumer Price Index was merely a temporary jump in inflation. Today, with the weekend immediately ahead and the June 16 meeting of the Fed’s interest-rate setting Open Market Committee looming on Wednesday, June 16, nobody wanted to get much further ahead of actual news from the central bank.
Inflation, as measured by the Consumer Price Index (CPI), rose by 5 percent in May from May 2020. That’s the fastest rate of increase since the Great Recession that followed on the Global Financial Crisis. Both the Federal Reserve and the Biden White House continue to say that the recent high rate of inflation is only temporary and that the rate will all as companies work glitches out of their supply chains and recalculate post-pandemic consumer demand. Today the stock market agreed with that view. At the close the Standard & Poor’s 500 was up 0.47% and the Dow Jones Industrial Average had gained 0.06%. The NASDAQ Composite was ahead 0.78% and the BIG TECH heavy NASDAQ 100 was higher by 1.05%. The small cap Russell 200 was off 0.68%. The locus of the biggest price increases does support the Fed’s view.
The Federal Reserve’s Revere Repurchase Facility, the way for banks to park short-term money with the Fed overnight, keeps attracting more and more cash from banks. Even though the Fed ways 0% interest. As of June 8 banks were placing $497.4 billion–roughly half a trillion–with the Fed overnight.
The amount parked with the Fed has been growing too. And the total parked each night with the Fed could hit $1 trillion by the end of the second quarter of 2021, according to the Bank Policy Institute
The CBOE S&P Volatility Index (VIX) dropped 8.9% on Friday, June 4, to 16.44. It’ up just slightly today to 16.73 (up 1.89%) as of 2 p.m. New York time. That’s, in my opinion, an extremely low reading on the fear index considering how many potentially market moving volatility events we’ve got ahead of us over the next six months. (For a list see my Special Report: 5 picks and 5 hedges for a falling market.) So today, June 7, I’m adding another Call Option on the ViX to my Volatility Portfolio.
Today’s installment includes one hedge (on the ViX) and one stock pick (Lam Research.) Now if you’ve been following along with the logic that I’ve laid out in this Special Report, you know that stocks face months of potential volatility around the Fed’s June 16 meeting (What will the Fed say about ending its $120 billion in monthly bond purchases?), the August global central bankers confab in Jackson Hole (Will the Fed use the occasion, as it has done in the past, to indicate a coming change in interest rate policy?), the Fed’s September 22 meeting (Will the Fed be content to say nothing with the next “important” meeting not until December?) and then the central bank’s December 15 meeting.) That’s a large number of occasions that could set the stock market to worrying again. And then, of course, there’s OPEC and the price of oil, the battle over the recently announced Biden budget, the continued logjam on infrastructure spending, and fact that the pandemic is still running at full speed in countries such as India (and who knows what the return of cold weather and forced winter “togetherness” will do to infection rates in the developed economies of the northern hemisphere.) At 16.74 on the VIX, you don’t need a panic to produce a profit on higher volatility. The VIX was at 22.18 on May 19. And then there are the even higher VIX levels of 27.59 on May 12, 28.57 on Marcy 4, and 28.89 on February 25.
You can lead a horse to water but you can’t make it him drink. You can flood the financial system with money but you can’t make banks lend or companies invest. That’s a classic potential problem for the Federal Reserve whenever it tries to use cheap money to stimulate economic growth. And it looks to be rearing its head now–which could create problems for the economy–and its growth rate–once the post-vaccine recovery has started to cool.
The Wall Street adage “Sell in May and go away” looks to be spot on this year. At the close yesterday on May 18, the Invesco QQQ Trust ETF (QQQ), which tracks the NASDAQ 100, was still p 2.83% for 2021, but down 2.96% for the last three months and off 5.79% for the last month. But the full saying in its original form runs “Sell in May and go away; Don’t come back until St. Leger’s Day.” St. Leger’s Day marked the running of the third race in the British Triple Crown, which took place in September. The advice was to sell ahead of the quiet summer London social season. The adage as I learned it (not in England between the wars, mind you, since I’m not either that old or that patrician) advised to “Buy on NEA,” the big technology and venture capital conference usually held in November. That seasonal timing strategy let investors reap the gains from, historically, the six best months of the yer (November through April) and avoid the sluggish performance of May through October. From 1950 through 2019 the November through April period of each year saw the Standard & Poor’s 500 gain 2283.7 points, according to calculations by Jeffrey Hirsch in the Stock Trader’s Almanach. That’s against gains of just 610.79 points in the worst six months during that period. But this year? When should an investor or trader who has sold in May think about coming back?
Today, May 13, investors and traders sold everything on the surprisingly strong April inflation report. This kind of sell everything reaction is typical of this first stage in a big market shift in sentiment. The question now is How long does this stage last? And When does the buying of winners in this new scenario kick in (along with continued but less violent selling of the losers?)