Like Icarus, the stock market may be flying too close to the sun these days.
The mood seems euphoric, with many headlines calling for further gains and analysts’ price targets reaching absurd levels. However, as the mood continues to escalate, it seems that the wax is starting to melt, with interest rates rising, the strengthening, and global markets faltering.
rates yesterday climbed another ten bps to finish above 4.4%, a day before the October , which rose by 2.6% on an annualized basis last month, compared to 2.4% in September. The reading was in line with economists’ estimates.
The equity market seems to disregard the CPI report, as noted by the low 1-day reading of around 10. However, given the positioning of the 10-year Treasury, the inflation reports to follow later in the week may be much more significant than they appear.
At this point, the 10-year rate is now trading around 4.43% and could rise much higher, especially if the are hotter than expected. Certainly, given the positioning heading into these reports, the rest of the week could suggest that an even bigger move in rates is coming.
The same could be said of the , which has been at its weakest level since October 2022. The current position appears to be critical.
seems to be positioned similarly.
It seems also to be the same for the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:).
Additionally, there have been significant signs of weakness across both developed and emerging markets. The German has seen a notable downturn over the past couple of weeks and could arguably be forming a head-and-shoulders pattern.
At this point, the signals from other parts of the market certainly aren’t looking great, and the question becomes how much longer it will be until the US markets start to succumb to rising rates and the stronger dollar.
The has hit the upper end of the rising wedge pattern that has been in place since August. Based on this chart, this pattern has no more rising wedges. There was a smaller wedge at one point, but that clearly failed to hold; now, the (blue) wedge is the only one left.
In the meantime, the 1-month implied correlation fell below 10 yesterday, which is historically at a very low level and tends to be around the lower end of the range. Typically, when the 1-month implied correlation bottoms out, the stock market tops.
Keep an eye on the Biotech . It has been consolidating in a triangle pattern, and it had appeared to break out, but now it has come back down and into the triangle, which could be part of a throw-over pattern. If it is a throw-over, then we need to watch for a potential break lower. The Biotechs tend to be a good proxy for where rates are heading, and so if rates go higher from here, biotechs likely do poorly.