3 Things… 

1. Equity Trends: S&P500 continues to trade rangebound around 3600, trend continues to be DOWN and 11% below its 200-day MA; the NASDAQ likewise range-trading between 10,200 and 10, 700–around its June 2022 low, and is about 15% below its 200-day MA, strong DOWN trend remains intact; Dow is also trading between 29,600 and 30,800, about 7-8% below its 200-day MA. About 18% of the S&P 500 and 20% of the NASDAQ, respectively, are above their 50-Days; Bulls22:Bears56; VIX 29.98; [1]
2. Bonds: 10Y 4.286%–14 Year High; 2Y 4.54%–Highest since 2007; 30Y 4.352% [2]
3. Sectors: Best 3-month sectors: Energy (+16.97%); Healthcare (-3.18%); Industrials (-3.73%); Crypto/Bitcoin -0.56%; [3]

This Week’s Quotable

“To me, what’s necessary here is the 10-year yield just stops rising, reaches the peak level. The market could take off on that. It doesn’t even need yields to come down.” Jim Paulsen, chief investment strategist at The Leuthold Group, said Thursday, as reported by CNBC Friday. [5]

Recent Highlights

• Existing Home Sales decreased to 4.71 million (10/20)
• Leading Indicators decreased by 0.4% (10/20)
• Initial Claims declined to 214,000 (10/20)
• Crude Inventories decreased by 1.7 million bpd (10/19)

In the Markets

U.S. stocks ended lower on Thursday despite strong earnings releases, as investors continued to gauge the prospect of the Fed raising rates yet again in November. An important Fed official suggested that the Fed would continue to do so. The benchmark U.S 10-year treasury yield climbed past 14-year highs. All three major indexes ended in negative territory.

How Did The Benchmarks Perform?

The Dow Jones Industrial Average (DJI) slid 0.3% or 90.22 points to close at 30,333.59 points.

The S&P 500 fell 0.8% or 29.38 points to finish at 3,665.78 points. Eight of the 11 broad sectors of the benchmark index closed in the red. The Utilities Select Sector SPDR (XLU), the Industrials Select Sector SPDR (XLI) and the Consumer Discretionary Select Sector SPDR (XLY) declined 2.5%, 2% and 1.9% respectively, while the Communication Services Select Sector SPDR (XLC) gained 0.2%.

The tech-heavy Nasdaq lost 0.6% or 65.66 points to end at 10,614.84 points.

The fear-gauge CBOE Volatility Index (VIX) decreased 2.5% to 29.98. A total of 11.4 billion shares were traded on Thursday, lower than the last 20-session average of 11.6 billion. Decliners outnumbered advancers on the NYSE by a 2.12-to-1 ratio. On Nasdaq, a 1.34-to-1 ratio favored declining issues.

Fed Official Indicates Rates Would Continue to Rise

Philadelphia Fed President Patrick Harker said Thursday that the central bank is not done with raising interest rates in the short term as inflation remains high. However, he mentioned it was likely that the Fed would go slow on the tightening process next year and take stock of how its rate increases have been impacting the economy.

“The Fed is actively trying to slow the economy,” and “we are going to keep raising rates for a while,” Harker said in a speech. “Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year,” he pondered. “Sometime next year, we are going to stop hiking rates,” Harker added, “at that point, I think we should hold at a restrictive rate for a while to let monetary policy do its work.”

The market has not fully priced in the effects of a 75 basis point rate hike in a Fed November meet, and gave up early gains made from earnings numbers as Harker’s comments emerged. The Fed continues to keep investors on tenterhooks as to whether it will be able to attain a soft landing of the economy with this incessant tightening of policy. The market had some good news from Europe as European stocks did well on news of the resignation of the British prime minister, Liz Truss, but it could not sustain the momentum.

Benchmark Treasury Yield Hits 14-Year High

The U.S. 10-year treasury yield rose on Thursday, hitting 14-year peaks as data showed that a still-tight labor market has influenced investors to bet on the Fed raising interest rates aggressively. The comments coming in from Philly Fed President Harker also did not help, as the benchmark treasury yield hit 4.228%, its highest level since June 2008, during the session.

Yields move in inverse relation to stock prices. Higher bond yields have a negative effect on stocks because they push down the relative value of earnings from these stocks in the future. Utilities and Consumer Discretionary were hit particularly hard on Thursday. Consequently, shares of American Electric Power Company, Inc. (AEP) and The Kraft Heinz Company (KHC) lost 2.3% and 2.6%, respectively.

Economic Data

The Labor Department said on Thursday that initial jobless claims fell to 214,000, decreasing 12,000 for the week ending Oct 15, from the previous week’s revised level. The previous week’s level was revised down by 2,000 from 228,000 to 226,000. The four-week moving average increased to 212,250, marking a rise of 1,250 from the previous week’s revised average. The previous week’s average was revised down by 500 from 211,500 to 211,000.

Continuing claims came in at 1,385,000 for the week ending Oct 8, increasing 21,000 from the previous week’s revised level. The previous week’s numbers were revised down by 4,000 from 1,368,000 to 1,364,000. The 4-week moving average came in at 1,365,000, an increase of 2,250 from the previous week’s revised average. The previous week’s average was revised down by 1000 from 1,363,750 to 1,362,750.

Realtors reported that Existing Home Sales decreased for the eighth month in a row for September, coming in at a seasonally adjusted annual rate of 4.71 million. This was higher than the Consensus Estimate of 4.67 million but lower than the previous period’s sales of 4.78 million.

The Conference Board reported its Leading Economic Index had gone down 0.4% in September after remaining unchanged in August. This is wider than the consensus decrease of 0.3% for the period. [6]

Sources: [1][3][4] Stockcharts.com; [2] cnbc.com; stockcharts.com; [5] Treasury yields could be peaking soon, could ease pressure on stocks (cnbc.com); [6] Zacks Professional Services, “Today’s Key Market and Economic News” for Friday October 21, 2022;