I’ve been asked a few questions this morning about the decline in equity markets and the initial market reaction to the newly approved and listed bitcoin ETFs. Both have been characterized by major head fakes this morning.
Starting with equities, we entered the day on “S&P 500 Record” watch. The watch began yesterday, as SPX peaked at 4790.80, tantalizingly close to the record close of 4796.56 set on January 3rd, 2022. Ignoring the fact that 2023’s ferocious rally merely recouped the bulk of 2022’s losses, it is always exciting if we can set a new all-time high in a key market benchmark. (The all-time intraday high is 4818.62, set the morning after the record close.)
Yesterday’s advance, which lacked an obvious catalyst other than the gravitational pull of a potential record, stalled after some comments from New York Fed President Williams. He offered another reminder that rates will likely need to stay elevated “for some time” until the Fed is confident that inflation is returning to 2%. As with many of the recent commentary from Fed speakers, it is at odds with the most bullish interpretations of Chair Powell’s post-FOMC press conference. But also, as with much of that commentary, it provided just a modest speed bump for enthusiastic traders. The supporting cast can say whatever they want, but the audience only really wants to hear from the star of the production.
It was fascinating to see this morning’s attempt at a record despite a piece of negative economic news. Although Core CPI appeared to rise by an as expected 0.3% on a monthly basis, it was actually slightly above expectations because the annual rise was 3.9%, above the 3.8% consensus. Headline CPI rose by the same 0.3% on a monthly basis, but only 0.2% was expected. None of this was dire, but neither was it a positive.
The initial reaction, which saw index futures give back their small early gains and fall modestly, fit with the data and our expectations. After I visited Yahoo Finance yesterday, this was their takeaway: “Inflation report: An upside surprise isn’t priced in, strategist says.” My thinking was shaped by a podcast that I taped with some colleagues earlier this week. The idea was that we’ve been riding a wave of positive feelings about markets and the economy, meaning that a decent result was already priced in, while a worse result was not.
I was thus quite surprised when stock futures halted their minor decline just before the open and began to turn higher. There appeared to be no reason for the advance, but when some key “Magnificent 7” stocks moved higher, they pulled indices along with them. If we had closed at 9:35, that would have been an all-time high close for SPX. But we didn’t. There was no follow-through.
As usual, I get many more questions when markets go down than when they go up. I described it this way to an inquiring reporter:
We had a couple of failed attempts at a record high in SPX. Yesterday’s was a 0DTE-fueled rally on light volume that got squashed by Williams’ comments; today’s was a total head fake based on nothing (in spite of CPI)… Somehow, despite the slightly higher CPI and lower weekly and continuing claims, rate cut expectations rose (March at 71% vs 68%, 5.84 cuts in 2024 vs 5.62). Based upon what?… The move higher at the open was either a phony attempt to get others to push us to a new high, or simply a continuation of the recent trend of us rising at the open despite any rationale… The subsequent fall is the failure of yesterday and today’s attempts at new highs… Remember, when we go up by this amount – like we did yesterday – it’s not news. Stocks are “supposed” to go up. When they go down by a similar amount, “something’s wrong”.
As I write this around noon EST, both SPX and NDX are off their lows but still down about -0.7%. Who knows, we might get another push higher. Comments by Cleveland Fed Chair Mester pushed back strongly against a March cut, but the market is still pricing in a 70% chance. (Remember what I said about ignoring the supporting cast’s comments.) We’re expecting to hear from Richmond Fed Chair Barkin and learn the results of a 30-year Treasury auction shortly. Either can push markets higher or lower in their wake. But this morning’s lesson was that hope and momentum don’t always trump economic realities.
Speaking of head fakes, here’s a spectacular one:
Bitcoin, 24 Hours (starting at 16:00), 1-Minute Candles
Source: Interactive Brokers
We see the spike that occurred after the news about the SEC approval broke (for real, this time) yesterday afternoon. It faded, only to be dwarfed by an 6% move higher as the first wave of bitcoin ETFs opened for trading. That didn’t last long. I don’t know if that was genuine enthusiasm by ETF buyers pushing the cryptocurrency’s price higher or some, ahem, opportunistic, price appreciation as the faithful attempted to goose prices higher (or some of each), but that too didn’t last long. My contention that ETF approval would be a “buy-the-rumor, sell-the-news” event for bitcoin looked highly doubtful for a few hours, but as of now, it’s still not proven incorrect.
I wish there was some clear-cut way of knowing which moves are lasting and which are head fakes. When they’re occurring, the market doesn’t tell us. The best clue is to look for the rationale. If it’s based on genuine news – and not news that’s been widely anticipated – then it’s probably real. If not, then it’s likely not.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
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Disclosure: ETFs
Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Digital Assets
Trading in digital assets, including cryptocurrencies, is especially risky and is only for individuals with a high risk tolerance and the financial ability to sustain losses. Eligibility to trade in digital asset products may vary based on jurisdiction.
Disclosure: Bitcoin Futures
TRADING IN BITCOIN FUTURES IS ESPECIALLY RISKY AND IS ONLY FOR CLIENTS WITH A HIGH RISK TOLERANCE AND THE FINANCIAL ABILITY TO SUSTAIN LOSSES. More information about the risk of trading Bitcoin products can be found on the IBKR website. If you’re new to bitcoin, or futures in general, see Introduction to Bitcoin Futures.
