Stocks rose again yesterday, following the second quarter of negative real GDP growth. The S&P 500 climbed by 1.2% to close at 4072. The rally extended as real yields fell on the day, and the TIP ETF rose to its highest level since early June.
Rates have made a huge move this year, and we appear to be going through a period of consolidation. I do not think it is a change in trend, though. The dollar has been holding up, and as long the dollar remains strong, I do not believe there is a change in direction. But as long as the TIP ETF rises, then stocks can rise. This has worked extremely well all year, and it doesn’t seem like the time to abandon the thesis.
But there will be a lot of economic data between today and next Friday. Today we will get the University of Michigan inflation expectations and the PCE readings. Then next week, the ISMs and Jobs data. So this can change quickly, so watching this ETF is very important.
How far can the TIP yield rise? It is tough for me to say at this point. It sure looks like it is getting overbought, and the pattern yesterday looked like a hanging man, but I’m not the best with candlestick patterns. The RSI is very close to 70 as well. So it could still go somewhat higher, but it could be the peak too. I just do not know at this point.
Inflation Expectations
The problem is that inflation expectations are starting to rise again, and with nominal yields falling, real yields need to fall. This goes completely counter to what the Fed wants, but the Fed is disappearing now for the next two months, and who knows if Powell can deliver a message at Jackson Hole that matters.
Why are inflation expectations rising? My best guess is that copper is rising. Copper and breakevens have a strong relationship.
The QQQ has been rising, and RSI has been improving, which would suggest that higher prices may come. The real test doesn’t come until $313.
The S&P 500 is in the same boat for now and testing key resistance level. A break out send the index to 4,175.
Amazon
Amazon (NASDAQ:AMZN) reported better than expected sales and guidance, and earnings missed again. In contrast, cash from operations missed the forecast. Based on my rough calculations, cash flow from operations over a trailing twelve months appears to be still falling. But if that turns the corner, that would make a big difference. For now, the stock is filling the gap.
Apple
Apple's (NASDAQ:AAPL) results were better than expected, but the company didn’t give the greatest guidance. Specifically, services revenue was expected to decelerate, while FX headwinds will hit overall revenue. Additionally, gross margins for the next were weaker than expected. Typically, this type of guidance is the type that would send the stock lower. So not sure why it is holdings its after-hours gains.
