Coiled Spring Capital Mid-week Report 8/23/2023

Over the weekend we wrote that we expected the stock market to bounce back this week. This began with Friday’s reversal, carried into today in front of the $NVDA report. While we don’t like to think an earnings report can change the direction of the stock market, NVDA carried that weight as the media, all the bears, and a good chunk of Fintwit believe the rally for most of the year was around AI hope. We don’t believe that one bit, although it certainly added to the momentum. The stock market likes to trade on narratives and this one certainly has risen to the top.

Here is the excerpt from last weekend’s conclusion:

“We think the stage is set for a short-term relief rally…”

We also like to believe that the market is a good forecaster of the future, which means the rally today was likely propelled by an expected strong NVDA report. NVDA didn’t disappoint and delivered another exceptional and record breaking earnings report. NVDA gave guidance that was 30% above the street for next Q and approved a $25B buy back. Importantly they dispelled the belief that chip supply wouldn’t keep up with demand. This will benefit the chip sector which has been languishing in Aug, much like the rest of tech. Tomorrow I suspect this will reclaim the 50 day MA and a big step to healing techs wounds.

But the bigger issue facing the tech trade was the incessant drubbing of treasuries and the relentless rise of rates. Higher rates usually imply lower multiples for growth stocks, but poor US and European macro data saw rates reverse quite abruptly today. This was the kindling for the rally today and NVDA just doused it with gasoline.

The 10 year saw quite the reversal (-5%), which seemingly always occurs at a familiar place. That place being the high from Oct ‘22. Did we just see the highs for rates for the year? It’s possible. There is a growing narrative that the Fed’s policies are too restrictive.

Fed Fund Futures probability of another rate hike did move lower vs. yesterday.

And you’ll notice that the probabilities for cuts increased next year.

We have been telling our readers that the bond market is now the most important determinant of stock market direction and any material move in the Fed Fund Futures will move the market. While today’s bond moves are not astronomical, they may be telling a bigger story. Powell will be testifying at their annual confab this Friday, and probabilities for a dovish Powell just increased.

Get your popcorn ready!

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