D&D Note (7.5.2022) ~ The 2-10 Year Spread Inverts Again and Oil Falls Below $100 ~
Stocks gapped down big to open the day after the holiday weekend but rallied back during the day led by tech stocks.
The NASDAQ turned positive midday and ended firmly in the green while the DOW finished well off the lows but still in the red and the S&P 500 finished the day barely positive.
The 2-10 Year spread inverts again today (meaning the 2 Year yield is higher than the 10 Year yield) flashing recession warning.
FED Fund futures rate for peak rates has come down from 4.08% on June 14 to now today 3.27%.
Oil breaks $100 falling more than 8% as recession fears gain steam. Commodities from metals to grains all sold off today.
D&D is remaining cautious in the near term for all risk assets. If we do see a sustainable Bear Market rally back above 4000 we would use that as another opportunity to de-risk our portfolio. Ultimately we do see the market falling back to lows if not create a new low sometime in the next two months.
The market is beginning to worry less about inflation and more about an economic slowdown. This is why we saw the NASDAQ have strength today with tech stocks rallying while stocks tied to economic activity sold off.
Stock Specific News:
Ford dropped over 4% hitting a new 52-week low after vehicle sales for Q2 missed expectations.
Tesla gets price target trimmed at JPMorgan saying shares could fall more than 40% on weaker deliveries. On the other hand Deutsche Bank sees Tesla rallying above $1,100 on a recovery in the second half of the year.
YUM Brands is close to selling its Russian KFC restaurants after already selling its Pizza Hut franchises in May.
HP fell 2% after Evercore ISI downgraded the stock to in line from outperform citing difficulties in the PC market.
Crocs soars 9.5% after Loop Capital upgraded to buy citing the shoe company is not a pandemic-era fad and recent declines are overdone.
Market Knowledge Tip:
When the 2-10 Year Yield spread inverts with the 2 Year yielding more than the 10 Year that is the first signal pain in the form of a recession is coming 6-18 months out.
The 3-month yield inversion is the near term signal that a recession is within months away.
The reason the inversion matters and signals recession is it implies banks will be not be able to yield enough due to where rates are and thus begin to stop loaning money creating a vicious cycle leading to recession.
Closing Markets (as of 1:15pm PST)
DOW down -0.42%
S&P 500 up 0.16% (3,831.39)
NASDAQ up 1.75%
VIX up 0.15% to 27.57
2 Year Note down -1.04bp to 2.83%
10 Year Note down -5.39bp to 2.83%
Oil down -8.079% to $99.67 a barrel.
Gold down -1.982% to $1765.80an ounce.
Bitcoin up 3.54% to $20,683.29
Ethereum up 2.70% to $1,163.80
~ Dave James / Principal Trader and Market Strategist