If this is a bottom, it’s without the usual signals. Stocks are up modestly in early trading Wednesday, but the usual signals of volume spikes and higher volatility are still not present. Most importantly, none of the concerns about rising rates have been assuaged. How sudden was this move toward 5% in the 10-year Treasury yield? Chris Verrone at Strategas noted that the number of sellside analysts who predicted that the 10-year would end at 5.0% or higher at the end of 2023 is: zero. Not one single analyst. Yet here we are, with the 10-year at 4.55% yesterday and looking like it wants to get to 5.0% fast. JP Morgan CEO Jamie Dimon didn’t help, with speculation that 10-year yields could go to 7%. “Until the market proves otherwise, the trend in rates remains up,” Verrone said. You’d think with all the negative headlines (China, strength in oil and the dollar, UAW strike, government shutdown coming, return of student loan debt payment), there would be some flight to Treasurys, but no. The opposite. The macro worry is that rates are headed higher. “The surprise today was the failure of a Treasurys haven bid to emerge despite persistent equity weakness throughout the day,” Mike O’Rourke from Jones Trading wrote in a note to clients Tuesday night. You’d think the soft landing was in trouble, but it’s very much alive. Minneapolis Fed President Neel Kashkari said there was a 60% probability that a soft landing would indeed occur: “After potentially one more 25-basis-point federal funds rate increase later this year, the FOMC holds policy at this level long enough to bring inflation back to target in a reasonable period of time.” He gave a 40% chance that inflation would require more rate hikes to bring it under control. Here’s what’s missing for a bottom: a volume push, and more panic. I’ve said many times that the first 5% downside happens slowly because everyone buys the dip. The second 5%-10% downside usually sees an acceleration in volume and volatility. That’s what’s missing. There is acceleration in price: the S & P 500 is down almost 4% since the Fed meeting, but not in volume and not much in volatility. Total equity volume yesterday was 10.4 billion shares, well below the September 2022 average of 11.4 billion, and 3% below the average level even for August, a vacation month. The CBOE Volatility Index has moved to 18 from about 14 in the past week, but that is still in “no-panic” territory. The long-term average VIX is 20, and most market watchers see panic levels when it’s at 28 and above. Modest volumes, relatively low volatility with prices down notably means there is no selling panic, but there is a buyer’s strike in stocks. Alec Young, chief investment strategist at MAPsignals says that makes perfect sense. “There’s a very tight correlation between equities and rates. They need to see rates come down before they have confidence to buy stocks again.”
