Bulls earlier this week gave back all of Monday’s meager gains and then some as soaring interest rates reminded investors of the bad old days prior to the Great Recession. The Nasdaq 100 closed at 14,566, a decline of 1.8%, states Jon Markman, editor of Strategic Advantage.
The weakness of the benchmark was a strident reminder that bears are ready and willing to pounce on rallies toward resistance. Technology issues moved higher on Monday and briefly neared the 20-day moving average at 14,910.
The catalyst for the weakness this week has been a dramatic rally in interest rates. The yield for the Ten-Year Treasury note reached 4.8% on Tuesday, the highest level since 2007. Older professional money managers remember those years with discomfort. The bursting of the American housing bubble and all of the financial fallout from that event led to a prolonged recession.
Unemployment reached 10.6%, and banks were hamstrung to lend to businesses amid restrictions imposed by federal regulators. Stocks swooned as confidence about the future of capitalism waned. Although bears will draw comparisons between now and then, the analogy is unfair at best.
The Great Recession was primarily a story about systemic problems within the banking sector. Loans were collateralized improperly. The current crisis is about the Federal Reserve reducing, and then raising its key bank lending rate too quickly, causing dislocation.
Yields are currently rising; however, sentiment could shift quickly if the economic data turns weaker. This seems inevitable given rising inventories in the automotive and homebuilding sectors.
There is important overhead resistance for the NDX at 14,910, then 15,150, the 50-day moving average. Support for the benchmark is 14,505 on a closing basis, then 13,656, the gap from the May breakout.
Double Trouble: Our NDX timing model is now neutral. A close above 15,150 will flip the model to bullish. Stay tuned.
