The Canary in the Silicon Mine

US equity markets were under extreme pressure in September and part of August as the Fed has been relentless in trying to bring inflation down. The jump in interest rates has been extreme, ranking as one of the biggest moves in rates ever, something equity markets are not particularly fond of.

Right now, both the Dow and the IWM have negative TSI (Trend Strength Indicator) rankings, which is a risk-off indication. On the flip side, the S&P 500 just had a convincing bounce off its 200-day moving average.

Mortgage rates went from a low of 2.25% to over 7% in 2 1/2 years’ time, with US long bonds dropping more than 50% in value from their highs set in March of 2020. The rate of change has been historic.

Markets have now moved from “cash is trash “to cash is NOT trash” with T-bills being an attractive investment as short-term rates now are higher than the inflation rate by over 1%. According to Ray Dalio, investors will be inclined to move money out of equities to short-term fixed income.

Meanwhile, we had an important Jobs (Non-Farm Payrolls) report on Friday that was much stronger than expected. After the initial reaction, which was a lower open (down about 1%) equity markets rebounded and closed up over 1% for the SPY and almost 2% for Nasdaq 100.

Equity markets might have shrugged off the strong jobs report on Friday, but the long bond (TLT) did not, closing down over 1% while short-term rates eased. This reduced the yield curve inversion which is seen as the next step for indicating a recession is coming. The yield curve inverts first and then heads back closer to normal before a recession hits.

Now getting back to the Canary in the Silicon mine, one of the key themes over the past 7 trading days has been that Semiconductors have held up well showing leadership over benchmarks. Semis are a risk-on indicator and when they lead the markets it is considered a positive for stocks in general. Also noteworthy, the outperformance was on good volume, so it is not to be dismissed.