Bond Market Signals More Trouble to Come

Sep 04, 2022 | What is the Bond Market Telling Us About the Market?

Bond Market Faces Biggest Decline in Decades

Stocks were once again trading down, mounting into three straight weekly losses for Wall Street. Traders were under heavy pressure on Friday, as Treasury bond yields dropped lower and the August jobs report showed solid gains in hiring and easing wage pressures. 

Job Market Stays Hot

The Bureau of Labor Statistics recently released the August totals for job growth. 315,000 new jobs were created in August, while unemployment ticked slightly higher than its post-pandemic low to 3.7%. Additionally, the average hourly earnings rate also moved higher, now up nearly 5.5% than this time a year ago. Wages jumped 0.3% for the month of August. 

While slowing wage increases may be seen as positive news for Wall Street, this may be temporary good news. The Labor Department noted total vacancies took a big jump higher in July. Total vacancies were just over 11 million in July, adding to concerns that faster than expected wage increases may continue to be needed. Wage increases have been necessary as of late, to help bring more Americans back to the workforce. 

Yields Drop

Treasury yields also dipped lower thanks to increasing pressure caused by wage gains. Add in a slight uptick in unemployment, and we get an environment ripe for additional rate hikes from the Fed. Odds are going up that the Fed will apply another large rate hike by Sept 21st. This may suggest more downside potential for bond prices. The Treasury market has lost over 10% in 2022, putting it on pace for its deepest annual loss and first back-to-back yearly declines since the 1970s. We saw stocks begin to rally in the summer months of June and July, as recession fears increased the chances of rate cuts next year. 

Meanwhile, Chairman Powell once again emphasized that he’s solely focused on bringing down inflation. Currency, Two-year Treasury yields hit 3.55%, the highest since 2007. 

What We’re Watching

With a holiday-shortened trading week due up, we have several key economic reports due out this week. Each will provide key information about the economy, and the current state of the stock market. 

We’ve got the Consumer Price Index due up in the next week. Additionally, we’ll be getting several key data points regarding housing. As we’ve reported in the past, homebuyer sentiment has been hitting all-time lows, and this week we’ll get the latest regarding total mortgage applications as of late. We’ll also be reviewing the household net income report, which will highlight how much consumers are spending and saving in their homes. 

What it Means: Inflation has been the biggest driver of market sentiment in 2022. As inflation moves higher, the Fed has continuously tightened its fiscal policy. This merry-go-round has hammered stocks, with the S&P 500 down 17% from its all-time highs. While we saw a mini-rally forming for stocks over the summer, equities are once again under pressure.

After the latest report regarding job growth and unemployment, our sentiment hasn’t changed. As bonds continue to drop and the chances of another significant rate hike continue to rise, we stress caution when looking for trades this week. 

US Chip Ban

The US government recently levied new restrictions against Nvidia, the premier chipmaker and semiconductor manufacturer. These new laws will limit Nvidia’s ability to sell artificial intelligence chips to Chinese customers. Nvidia has a massive market share and its chips are used in a variety of tools and products. These restrictions aim to deal a significant blow to China, and its ability to develop cutting-edge technologies. 

This week, Nvidia disclosed they are no longer allowed to sell certain high-end microchips to China without specific approvals, provided by Washington DC. Some of these chips focus specifically on autonomous driving and voice recognition software. 

Nvidia currently holds a 95% target share, with AMD (Advanced Micro Devices) taking up the #2 spot. AMD has also received similar restrictions from Washington. Their restrictions also focus on self-driving cars but also include additional cloud services as well. 

This comes at a time when Washington has continuously looked to increase sanctions on exports made to China. This has forced global chipmakers to effectively choose between the US and China. The new sanctions look to apply another chokepoint to China and its semiconductor capabilities. 

What it Means: In a move that sounds like we’ve re-entered the Cold War, the US is now actively taking steps to slow down China’s technological advancements. The type of semiconductors created by AMD and Nvidia produce some of the most cutting-edge technology on earth. This comes as the US government continues to increase sanctions against exporting goods to China. 

Weekly Swing Trades

PNRG (Prime Energy)

October 2, 2022

Entry Price:

80.62

Stop Price:

76.85

Target Price:

88.04

Time Frame:

1 Week Hold

Expecting a short-term bump after a recent OPEC+ announcement regarding the a supply constraint to oil. The constraint would result in ~1M less barrels of oil per day, which should cause a price jump. Low RSI and bouncing off our 250 day moving average, both hallmarks of a good swing trade.

DV (Doubleverify)

October 2, 2022

Entry Price:

27.75

Stop Price:

26.75

Target Price:

29.00

Time Frame:

3 Week Hold

Using our moving averages heavily on this swing trade, look for continued strength as we try to notch out a 6-8% gain. Specifically, we are taking advantage of of a recent cross over in the 50 day moving average. Last week closed down, so wait for confirmation of a reversal.

Crypto.com Halts 5-Year Deal

Regulatory concerns in Europe have caused crypto.com to back out of a five-year sponsorship deal worth nearly $500 million with the UEFA Champions League, Europe’s premier soccer league. Crypto.com scrapped the deal over regulatory concerns in the UK, France, and Italy. Many of the new regulations have been put in place in response to Russia’s attack on Ukraine. We’ve also seen new legal issues. We’ve seen a rise in crypto advertising throughout sports, as the digital currency gains more mainstream acceptance. 

Upcoming Economic Reports

Market Performance- Week of 09.25.2022

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Weekly Watchlists

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Weekly Review

Market Performance- Week of 09.25.2022

Recent Winners

SBUX (Starbucks)

SBUX (Starbucks)

Entry Price:

85.00

September 11, 2022

Price at High:

89.90

Return for Members:

5.76%

Timeline:

2 Month Hold

Strong momentum over the last few weeks. Watch for a mean reversion, but if moving averages stay consistent look for an early play to open the week.

PNRG (Prime Energy Resources)

PNRG (Prime Energy Resources)

Entry Price:

83.20

September 4, 2022

Price at High:

100.00

Return for Members:

20.19%

Timeline:

3 Week Hold

PNRG had a drawdown to historical levels of support (around the 100 day moving average). Looking to make an entry in the coming days as we also have macro tailwinds with the energy crisis in Europe.

PYPL (Paypal)

PYPL (Paypal)

Entry Price:

87.00

August 28, 2022

Price at High:

103.00

Return for Members:

18.39%

Timeline:

4 Week Hold

Playing off the dip in June, we're starting to see momentum as the 50MA is crossing over the long-term averages. Look to for momentum to continue and an early entry on Monday.

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