The S&P 500 fell by around 65 bps on the day, with the index getting stuck around the put wall at 6,400. It was just never able to really break free of that level, most of the day, with the exception of earlier in the morning, but even then, it quickly snapped back.
For the index to move lower tomorrow, we will need to see the put wall move lower.
The index did manage to fall below an uptrend that started at the end of June, as well as the 10-day exponential and 20-day simple moving averages. That is something that hasn't happened very often, and so the drop today is notable from that standpoint. Whether it can be maintained is another story entirely, so one has to be careful getting too bearish too soon.
We did manage to give back all of the gains following that Speech by Jay Powell on August 22 at Jackson Hole. Which is not surprising, at the time I had noted that those straight line rallies tend to get retraced. However, the index was partially saved late in the day by more than $3 billion by Imabalcne. This helped to soften the blow. The buy imbalance was likely driven by the start-of-the-month inflows.
For right now, we need to see the index close below 6,350, which would then set up a drop to 6,200.
Rates continue to move up, with the 30-year today closing at 4.96%, while the 3-month Bill fell to 4.13%. This led to the 30yr-3mo, rising by almost 6 bps, to finish at 83 bps. At this point, the curve is very close to seeing a significant breakout, which could lead to further steepening to around 1.25%. The form is the harder part, but I still think rates on the back of the curve have further to rise, then the front of the curve has to fall.
Meanwhile, the 10/2 is very close to breaking out and moving past the high seen in April at 63 bps.
The interesting thing is that rates are rising all over the world; it is not just here in the US. In fact, they are rising much faster in places like the UK. The UK 30-year is now trading 73 bps over the US 30-year and has reached its widest point since October 2022, which we all remember was when Liz Truss had to resign as PM, and then you have to go back to 2011. Overall, this seems to be an important spot for this spread, given its history.
In the meantime, keep an eye on those Italian-German spreads after tightening to historic levels, the spread is starting to widen again. Where this spread goes will be a big tell for spreads globally.
Glossary
10-day exponential moving average (10-day EMA) – A technical indicator that gives more weight to recent prices over a 10-day period to identify short-term trends.
20-day simple moving average (20-day SMA) – A technical indicator that calculates the average price over 20 days, treating all days equally.
30-year yield (30yr) – The interest rate on U.S. Treasury securities maturing in 30 years, often used to gauge long-term borrowing costs.
3-month Bill – A short-term U.S. Treasury security maturing in three months, representing very short-term government borrowing rates.
Basis points (bps) – A unit equal to one one-hundredth of a percentage point, commonly used to measure changes in interest rates or spreads.
Buy imbalance – A situation where buy orders significantly exceed sell orders at market close, often leading to upward price pressure.
Curve steepening – A situation in which the spread between long-term and short-term interest rates increases, indicating rising long-term yields relative to short-term yields.
Jackson Hole – An annual central banking symposium in Jackson Hole, Wyoming, closely watched for policy signals, often featuring speeches from Federal Reserve officials.
Put wall – A concentration of put options at a specific strike price that can act as a support level for the underlying index.
Spread (bond market) – The difference in yields between two bonds, often used to compare credit risk, maturity, or regional risk dynamics.
Uptrend – A sustained upward movement in the price of an asset, defined by higher highs and higher lows over time.
Yield curve – A graph showing interest rates across different maturities of bonds, typically U.S. Treasuries, used to assess economic expectations.
10/2 spread (2s10s) – The difference between the 10-year and 2-year Treasury yields, often watched as a signal of economic cycles.
30yr-3mo spread – The difference between the 30-year Treasury yield and the 3-month Treasury bill yield, often used to assess steepness in the curve.
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