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Another Day, Another Head Fake

Another Day, Another Head Fake

Posted May 31, 2024 at 11:30 am
Steve Sosnick
Interactive Brokers

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)

3-Months, 10-Year Treasury Futures (red/green candles), SPX (blue)

Source: Interactive Brokers

So 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.

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6 thoughts on “Another Day, Another Head Fake”

  • Anonymous

    Could it be that decades of abnormally low rates are so ingrained in the investor psyche that it is a very hard addiction to shake? The Fed has taken all risk out of the markets by always coming to the rescue with lower rates at even the slightest hint of an economic sneeze. The Fed’s largesse has had very real economic consequences, just ask any aspiring homeowner.

  • Alex

    Could it be even remotely possible that the consensus estimates could be the part of the equation that is out of balance rather than the actually real numbers from the economy or the company posting the results?

  • Jack Shore

    As postulated by the brilliant James Hurst in his seminal work “The Profit Magic of Stock Transaction Timing”, this merely gives further reason to suspect that the value of the stock market is not necessarily based on fundamentals, yet rather by timing. I further suspect that the market makers know the timing playbook ahead of time and purposely manipulate the market to fool investors into taking the wrong side of the trade, such as the pre-opening rallies mentioned in this article that allow the market makers to go short after the opening & obtain a nearly certain profit as the manufactured rally subsequently fades. Retail traders simply can’t compete with the magnitude of funds that the colluding market makers wield.

  • John S.

    Agree with Jack Shore – the Big Money Institutions, Hedge Funds, Market Makers, etc., etc., feast on setting traps for the smaller retail guys. They can move prices to set up their profitable trades, and they have more timely information sooner than we do. As a result, we retail guys need to be agile, and patient and don’t chase initial price moves.


    Should there not be serious consideration for machine trading to be halted? Why should the retail investor have to deal with giant computers, how is that fair trading?

  • Thomas Anthony

    The SEC shoulda and still should outlaw it for FRONT RUNNING> That is simple, Nothing complicated here, just crooked government scared at future job prospectors and or private sector Plan B opportunities they are training for working at the SEC as attorneys, who should be barred from working for any publicly traded company for 10 years afte rthey leave. That would clean up the SEC and restrain frivolous hiring or fundamental ” TEMPORARY HELP”, ( how would you define it ?), ( 2-3 maybe 5 years s and they are gone more ( looking for options stock manipulators in BIOTECH< CRYPTO TACHNOLOGY etc., etc, clueless or crooked CEOs, COOs, CTOs, CFOs ( no shortage of that ), more or less. .

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