Mike Santoli’s market notes: Bond market tests stocks, GameStop rekindles, a tired S&P 500

Published Thu, Feb 25 20211:12 PM EST

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics The bond market is administering an ongoing test of equities' tolerance for higher yields. To date, not a lot of net damage has been done, the "reflation" dynamics helping cyclical sectors about as much as they're clipping defensive/growth groups. Even though it's a cliché to say, "Stocks can absorb higher rates for the right reasons if the move isn't too fast," doesn't mean it's untrue. Yet the wear and tear on mega-cap Nasdaq leaders and overbought conditions creeping into financials/industrials/energy keep the game interesting as it goes on. The S & P is barely hovering just above its breakout level of 3,870 and the January high around 3,850, the bulls trying to maintain the look of a solid uptrend, after making a visit near 3,800 intraday Tuesday. The wrinkle today is that short-term Treasury yields are rising a lot more than long-term ones. This means not just growth/inflation expectations improving but implicit expectations for eventual Fed tightening are rising a bit. Nothing like a desperate tantrum, but the relentless selling in the long end of the curve is pulling 2-to-5-year yields up to flatten the curve a bit. Nasdaq 100 continues to move tick for tick with bonds. A silver lining? Long Treasuries are getting mega-oversold, as the relative strength index shows here. Really suggests at least a bounce in Treasury prices (a retreat in yields) to relieve some pressure soon, which would likely mean a tech-over-banks phase for stocks. Just to reiterate, there is nothing essential or eternal about these stock-bond relationships. Tech is not drastically disadvantaged by somewhat higher yields nor do investors always trade the groups by these rules. But for now, these patterns are pretty ingrained in the day-to-day flow, so they get a ton of attention until these rules change. Even under the incremental pressure, the market digestion has so far been pretty orderly. The equal-weight S & P is all of 1% off a record high. The S & P 500 remains both tired and resilient, has slowed a bit, up less than 1% over the past month. I can hear the gears grinding a bit, parts of the market unsettled and things like emerging-market stocks and bonds starting to weaken as global yields rise. But no clear sign of stress or trend reversals yet in US stocks. For bubble-callers, it's worth noting the S & P 500 forward valuation has been steady for the past nine months as profit expectations continue rising in step with share prices. Still some indications of rebalancing away from stocks into bonds by pensions/asset-allocators into month-end this week, given the huge outperformance by equities. February shouldn't be a huge swing month for this but could act as an undertow for the indexes all else equal. Sentiment indicators have moderated from extreme-bullish readings, another sign of the market atmosphere cooling off a bit. The II advisor survey showed modest drop in optimism, the AAII retail-investor pool pretty neutral at this point and this weekly gauge on tactical-trading advisors equity exposure off the boil: And then there's GameStop and the broader hive of meme-momentum stocks. Whatever coalescence of factors rekindled the GME fire – stock had stabilized in the $40s, Keith Gill doubles down, CFO forced out over reported strategic differences, director and activist would-be savior Ryan Cohen tweets McDonalds ice cream cone photo implying "the machines are working again" – the mechanics are pretty similar. Gunning the call options, rallying the Redditors, targeting the shorts. Definitely some investor caution around the restart of this game. Unclear if the set-up is similar to January, though. Short interest lower across the board, former buyers chastened, options dealers pricing bets more aggressively to make bets harder to pay off. Definitely a sign that the new retail-trading energy will not simply dissipate – it will flow into different nooks of the market, drive mini-manias and micro-crashes, and keep things interesting for all. This stuff along with $50 billion in new SPAC money raised in under two months this year are where the animal spirits are brimming. Meantime, Facebook is about as cheap as the stock has been in its history outside the March 2020 crash and AMZN has been dead money for seven months. The cult of the new, catering to impatient capital. Breadth is skewed to the downside today, roughly 30% of volume in advancing stocks. Not a massacre but a culling of the flock. Credit spreads are softer, losing just a bit of their recent composure but not alarming. VIX has a bid, above 23. Still no real serious fear, which is fine given modest net losses in stocks. The VIX futures curve is still holding the "proper" shape, near-term contracts at a discount to more distant ones.

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This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics

The bond market is administering an ongoing test of equities' tolerance for higher yields. To date, not a lot of net damage has been done, the "reflation" dynamics helping cyclical sectors about as much as they're clipping defensive/growth groups. Even though it's a cliché to say, "Stocks can absorb higher rates for the right reasons if the move isn't too fast," doesn't mean it's untrue.