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Today’s activity is not as egregious as last Thursday’s, but it is cut from the same cloth. Last week, we saw a solid pre-opening rally on the back of Nvidia (NVDA) earnings that peaked immediately after the bell rang, only to close over -1% lower. This morning, thanks to a PCE Core Deflator reading that met expectations, we see something similar. Is this becoming a habit?To be sure, two days in just over a week hardly constitutes a trend. But when we consider that US equity markets also had late swoons during the prior two sessions, we must consider whether pre-market traders are expressing an exuberance that is simply not being matched by investors. Let’s consider the rationale for today’s head fake. Quite frankly, there was nothing special about today’s economic reports. On a monthly basis, both the PCE Deflator and the PCE Core Deflator were both exactly in-line at 0.3% and 0.2% respectively. Because there were no revisions, the yearly numbers also matched consensus. It would be quite understandable if traders were nervous ahead of the release of the Fed’s preferred inflation measure and that a relief rally ensued, but as we have seen all too often, mild relief had a way of morphing into major enthusiasm.Some of that enthusiasm stemmed from the bond market. Besides the benign inflation report, real personal spending came up short, falling -0.1% in April when +0.2% was expected. Bond traders took some solace from the weaker consumer, and we saw rates fall 3-4 basis points across the curve. Lower yields, higher stocks, right?Yet herein lies a problem that we wrote about on Wednesday. During this month stocks decoupled from bonds. We noted that stocks have been rallying this year even as bond yields rose, but that was because both were benefiting from improved economic expectations. A stronger economy led to solid earnings while at the same time forced traders to reduce their expectations for rate cuts from 6-7 to 1-2. Thus, yields rose, but for salutary reasons. Yet once the market settled upon 1-2 cuts stocks rose until mid-May. Then, rates began to rise again but stocks moved sideways, testing all-time highs. The modest sell-off that we have seen in equities is simply stocks playing catch up to bonds after ignoring them for a couple of weeks:
3-Months, 10-Year Treasury Futures (red/green candles), SPX (blue)
Source: Interactive BrokersSo far we may not be looking at anything much more meaningful than some understandable profit-taking after a very solid month. Or this may be some belated “sell in May” activity that could lead to a more substantial pullback. Remember, we noted that we don’t know if “sell in May” works until at least June. Looking ahead, we have the monthly jobs report next week, the NVDA ex-split date on June 11th, and an FOMC meeting on June 12th. We should get a better June reading after that.More By This Author:Momentum Trading Vs. Greater Fool Theory
Stocks Stop Ignoring Bonds (At Least For Now)
We Don’t Know If “Sell In May” Works Until June (At The Earliest)
