Uncertainty, Lagging Mag 7, Rate Cut Hopes: Market Takeaways

The market is a rollercoaster, and right now, it feels like we're at the top of a steep drop. The Mag 7 stocks, which have been the darlings of the market for years, are showing signs of fatigue. The uncertainty surrounding these stocks is palpable, and it's influencing investor sentiment in a big way. But what does this mean for the broader market, and what can we expect from the Federal Reserve's rate cut expectations? Let's dive in.

First, let's talk about the Mag 7. These stocks, which include the likes of Apple, Microsoft, and Amazon, have been the backbone of the market's rally over the past few years. But recently, they've been showing signs of weakness. The introduction of a Chinese large language model, for example, sent shockwaves through the market, causing these stocks to swoon. This volatility is a clear sign that investors are becoming more cautious, and it's influencing their decision-making processes.

But it's not just the Mag 7 that's causing concern. The Federal Reserve's rate cut expectations are also playing a significant role in the market's current state. The market has shifted from pricing in four to five rate cuts to just one, reflecting a change in expectations about the Federal Reserve's monetary policy. This shift has led to a surge in Treasury yields, which have risen by more than 100 basis points, or 1%, in just four months, with 10-year yields coming close to 5%. This level has only been reached once since 2007.

The rise in Treasury yields has put downward pressure on stocks, as the rolling 30-day correlation between the 10-year Treasury yield and the S&P 500® index has fallen back into negative territory. This means that bond yields have been rising for the "wrong" reasons, i.e., inflation concerns, which has put downward pressure on stocks. The percentage of members of the S&P 500 index trading above their 50-day moving average has fallen sharply over the past month to a new one-year low, indicating a lack of market breadth. This suggests that the market's longer-term breadth—the percentage of members trading above their 200-day moving average—hasn't been hit as hard, but there might still be some downside. If further weakness does unfold, it would be important to keep a close eye on the recovery in breadth. If the market resumes its trek toward new all-time highs without a commensurate improvement in underlying strength, the likelihood of a protracted drawdown would rise.



So, what does this all mean for investors? Well, it's clear that the market is in a state of flux, and it's important to stay vigilant. The Mag 7 stocks may be showing signs of weakness, but they're still a significant part of the market, and any further declines could have a ripple effect. The Federal Reserve's rate cut expectations are also a wild card, and it's important to keep an eye on how the market reacts to any changes in monetary policy.

In conclusion, the market is a complex beast, and it's important to stay informed and adaptable. The Mag 7 stocks and the Federal Reserve's rate cut expectations are two key factors to watch, and it's important to stay vigilant in the face of uncertainty. The market may be a rollercoaster, but with the right strategy, investors can navigate the twists and turns and come out on top.