U.S. stocks rebounded from overnight losses during the futures session to push to fresh post-panic highs on Monday, lifting large-caps above their 20-day moving average for the first time since late January.
The catalyst was ongoing buying demand for bonds — especially high-yield “junk” issues — which is calming the nerves surrounding higher interest rates seen earlier this month. But this feels a bit premature with new Federal Reserve chairman Jerome Powell set to make his first appearance before Congress on Tuesday.
In his pre-released statement, he noted high asset price valuations, a firming of inflation pressures and ongoing labor market tightness as reasons to continue on the path of increasingly aggressive policy tightening.
In the end, the Dow Jones Industrial Average gained 1.6%, the S&P 500 gained 1.2%, the Nasdaq Composite gained 1.2% and the Russell 2000 gained 0.7%. Treasury bonds strengthened, pushing down yields. The dollar was mixed. And both oil and gold moved higher.
Advancers outpaced decliners by a two-to-one ratio with 94 new highs and 26 new lows on the NYSE. Transportation stocks, especially airlines, led the way on comments from Warren Buffett (that he could buy an entire airline). The group gained 2.5% as a result. Pipelines were the laggards, down 1%.
Conclusion
The SPDR Barclays Capital High Yield Bnd ETF (NYSEARCA:JNK) chart above is the primary reason the market has been rebounding so powerfully over the last three sessions: A lift in high-yield bonds as their rates decline. This could be short covering. It could be an aggressive reach-for-yield dynamic … or it could be a combination of both.
But in order for that trade to work over the medium-term, the bond bulls need both inflation trends and the pace of the Fed’s rate hikes to slow. And that just doesn’t seem likely with the labor market at capacity, the economy at capacity and inflation dynamics set to accelerate this year.
The 10-year yield on U.S. Treasury bonds were nearing the 3% threshold — so some backfilling here was natural as everyone is watching that level as the beginning of the end for the 30-plus-year bull market in bonds.
Fed chairman Jerome Powell’s testimony is also likely to shift the attention back to the Fed’s efforts to normalize interest rates and further reduce its balance sheet holdings, covering up the recent dovish comments of the past few days by the likes of St. Louis Fed President Bullard and others.
A yield breakout should push stocks back toward their February panic lows.
Check out Serge Berger’s Trade of the Day for Feb. 27.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.
