Santoli’s Friday market notes: S&P 500 rallies as traders scoop up buying opportunities

Published Fri, Jul 9 20211:39 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. This market does quick shakeouts and gut checks, not bruising breakdowns and lasting panics. At least this has been the case for the past ten months, when the rotations have been benign and the corrections all localized. A flush lower in Treasury yields right down to — but not through — their crucial 200-day uptrend line and accompanying reversal higher in small-caps intraday were inklings that the selling was not indiscriminate or strategic. Both lows held, Treasury yields bounce, and the rally today is largely about traders grabbing for groups that got a bit overdone to the downside in the absence of further pressure on yields. Bond bulls taking some off the table ahead of new Treasury supply, a big CPI number and Powell in Congress next week. Second Friday in a row we've see a gap-up-and-gallop levitation to a new high. Right now, we are at exactly the levels in the S & P 500 – 4,362 or so – where the tactical-trading services that track clusters of options-dealer hedging said might slow the advance. As this chart shows, nothing says a Friday melt higher carries over the weekend. Noted yesterday the wobble in S & P 500 – like the mini-scare three weeks ago post-Fed – did nothing to undermine the overall trend, while credit indicators showed no stress either time. It remains an upward grind, with low momentum, one with something for everyone to quibble with – but an uptrend all the same. That can be true, and this period of unsettled, indecisive action could also resume next week. S & P 500 now in the second-longest run without a 5% pullback on a closing basis since 2016. The longest was a lot longer, from 2016 to 2018, a period during which investors systematically sold volatility and bet in continued calm until it created its own instability and in January came to a head in a flash correction leading to more than a year of no net progress in the index. From Ned Davis Research: If the yield drop has culminated for a bit, probably allows small-caps/banks/cyclicals to bounce further and perhaps allow mega-tech to rest for a bit. It's definitely a negative that the yield curve is flattening so much this early in an economic recovery. Not cataclysmic but a concern, big picture. As we've noted, transports, materials, homebuilders and banks all had 10% corrections, as did nearly half of all S & P 500 stocks. Market breadth has been quite poor, but that now turns into "oversold enough for a good bounce" in the short term. Along with all the technical drivers of the Treasury rally (short-covering, pension/bank rebalancing bid, reduced issuance) there is a real evaporation of longer-term inflation expectations blending with a sense that growth is perhaps headed for a soft patch and the Fed seems more likely to move sooner (too soon?) to head off inflation even as Powell insists otherwise. Next week's CPI and Powell testimony might clarify this. To keep it in perspective: The S & P is at a high, but up about 0.3% this week, sitting on 16% YTD gains. This usually precedes further upside in the second half but almost always with more choppiness. Earnings will be great and are muting valuation concerns, but everyone knows it and traders have sold EPS beats on balance the past three quarters. Market breadth rebounding strongly today, 80%+ upside volume, though Nasdaq new highs/lows unimpressive. VIX gives up the entire pop from yesterday morning. If it closes here under 17 would trigger what some see as a short-term Buy signal (a spike and drop of at least three points) and could confirm the market is on firmer footing.

Traders on the floor of the New York Stock Exchange.

Source: NYSE

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

This market does quick shakeouts and gut checks, not bruising breakdowns and lasting panics. At least this has been the case for the past ten months, when the rotations have been benign and the corrections all localized.