Monday Takeaways: The Market Has Selective Hearing

Shah Gilani|May 6, 2024

Have you ever seen a sandcastle competition?

What folks are able to build can be simply astonishing.

But the first ocean wave to reach a sandcastle can cause total destruction.

It’s an apt analogy for the markets.

We saw a rally last week…

It was a beautiful sight… but one built on sand. Nothing fundamental… nothing technical.

The markets heard what they wanted to hear… and sent stocks upward.

What’s really going on? Will the rally last?

I dive into it all in your Monday Takeaways.

See what will move markets – and your portfolio – this week in today’s video.

Click on the image below to watch it.

Transcript

Hey, everybody. Shah Gilani here with your Monday Takeaways, and they’re all going to be about what happened last week, and where we’re likely to go or not go based on what happened last week.

A lot of stuff to take away from what happened last week and what’s going to happen, because we’re in an interesting place.

It starts with what happened last week.

The markets were down, and then all of a sudden, we had the Fed meeting on Wednesday, the statement, the Q&A.

And the bottom line there, or I should say, the takeaway there, was markets didn’t care that Fed Chair Jerome Powell was actually hawkish, saying that inflation wasn’t really going in the right direction, and they were keeping an eye on it. What the market heard, what everyone heard, was that there weren’t going to be any more hikes. So that was a huge win for the relief rally that started.

Like, let’s go. Let’s start buying.

But what really triggered the bond market rally, which is what triggered the stock market rally, was the fact that the Fed is now going to cut back on their QT.

So QT is quantitative tightening. Quantitative tightening is the Fed cutting back on the bills, notes, bonds and agency mortgage-backed securities on their balance sheet. So as bills, notes, bonds and agencies, etc., come to maturity, they run off the Fed’s balance sheet. The Fed has been letting $60 billion a month run off its balance sheet. That means they’re reducing the balance sheet by about $60 billion a month.

What they’re now going to do is reduce the balance sheet by only $25 billion a month. So if $60 billion of bills, notes and bonds are going to mature and run off the Fed’s balance sheet, before, they would have been like, “Okay. That’s it. We’re $60 billion less on our balance sheet.”

Now they’re going to let $25 billion run off. So if $60 billion in a month is going to mature, they’re going to let $25 billion run off, not replace it. But the other $35 billion now, they’re going to replace.

So they’re going to buy bills, notes, bonds and agencies and put them back on their balance sheet. That’s a huge positive for the bond market because that means the Federal Reserve is going to be back in every month buying bills, notes and bonds. And if they have a huge potential runoff in a month, they’re going to be buying even more because they’re only going to let $25 billion run off.

That’s what triggered the bond market rally. The 2-year was north of 5%, now it’s, like, 4.7%, 4.79% this morning. The 10-year was 4.70% and higher, and now we’re, like, in an absolutely tremendous rally. The 10-year is now 4.47%.

That’s a big rally in a short period of time. The bond market rally triggered a stock market rally, and that really started on Wednesday. Apple had great news, well, better than expected news, because everyone was down on Apple, especially its China sales, and they were better than estimates, better than consensus.

And, really, that caused the stock to pop? No.

Here’s what really caused the stock to pop… Because no one really trusts those numbers as far as longevity in terms of the strength of Apple’s market share in China, which is under constant attack.

But what happened was a massive announcement, a record announcement of a buyback.

Crazy amounts of money are going to be spent. They’re going to spend crazy amounts of money buying back their stock. So that’s supportive of the stock. The stock popped.

Now, guess what?

That’s all good stuff. And then, of course, Friday, we had the jobs report, and there were fewer jobs created than consensus estimates. So that was like “Rah rah.” Oh, the unemployment rate ticked up to 3.9% from 3.8%.

That was supportive of bonds.

So if the economy is weakening… there aren’t as many jobs being created… the unemployment’s ticking up… the Fed’s going to have to cut, aren’t they?

Yes. That’s the theory. That’s the thinking.

And that’s, again, the rally that supported what happened earlier in the week. So we had these supportive events. The takeaway there is the market rallied, and it rallied because it had good news.

And folks who were short or folks who were looking to buy stuff on the cheap jumped in and had to cover or bought stuff that they thought, okay, it’s a great time. And, of course, bond investors bought bonds because if rates are going to come down eventually, you want to try and catch the high watermark for yields. So, yeah, a really good week.

The takeaway there is you have to love a rally… but it’s a “rally in the alley.” That’s what I see.

I’m looking at the Nasdaq 100. A nice rally right to just below its 50-day moving average. S&P 500, nice rally right to but just below its 50-day moving average.

Apple, nice rally, but guess what?

Right to its 200-day moving average.

So we’re seeing stuff move up, and it looks good. It’s impressive, and futures are up this morning. But let’s see how things go this week because we’ve just gotten to somewhere. We haven’t gotten anywhere important. We’re just working our way back up in a downtrending market to somewhere higher, and whether or not we can sustain elevated levels and consolidate – using a technical term – if you look at any chart, whether we can consolidate here in any of the benchmarks and move higher yet remains to be seen.

We’ve got Treasury issuance coming up, and there’s always going to be a question of whether or not that Treasury issuance is going to be well received. So far, it has been pretty good for the most part. If it continues to be good, and it should continue to be good, then we can possibly rally.

But we’re about 80% through with earnings. We got some big earnings coming up, but a lot of the news is out, and it’s pretty good. Earnings have been better than expected, but the real truth of the earnings being better than expected is from cost cutting.

Revenues were the only part of reported companies that have not been good.

Revenues have been down. Everything else has been good because of cost cutting. So companies aren’t increasing their revenues, they’re increasing their bottom line and their net earnings because they’re cost cutting, and that’s been really the story of this earning season. Remains to be seen with other big names coming up, but something to keep an eye on, people.

Consumers are starting to show a little wear and tear. We have the consumer sentiment number coming out, the University of Michigan number coming out on Friday, so keep an eye on that.

But this week really is going to be about how the market reacts to the rally at the end of last week. We had a great second half of the week last week, and whether or not that’s sustainable, we’re going to find out. I think we’ll find out in the first couple of days of this week whether or not we see some momentum.

And if we don’t see momentum, then we’re going to probably languish for a while. So your takeaway there from all of that is “Rah rah” for the rally, but it’s a “rally in the alley,” so be careful out there.

Catch you guys next week. Cheers.