We see a divergence in the market. Tech and semiconductors are starting the day higher, while financials continue to fall.
Not a lot of momentum, but it’s something.
If we can get this divergence into Wednesday, this would be an opportunity to add a new put position. We may add several bearish bets if a bounce can last into Thursday or Friday.
This could be precisely what’s in order, as there isn’t any additional inflation information coming out until the end of the week.
Everyone knows the Fed is raising interest rates, but they’re also letting their balance sheet run-off, which is the other tool in their arsenal to attack inflation.
A balance sheet run-off is when the Fed elects not to reinvest when securities mature. This lowers demand and causes the securities, such as bonds, to fall.
Bonds and interest rates have an inverse relationship, so when bonds fall, that means interest rates rise.
So not only is the Fed raising the federal funds rate, but by reducing its balance sheet, it is also inadvertently raising market interest rates.
Bond traders know this and want to get ahead of the cycle, so they continue to sell their holdings.
So if we see a rally, I wouldn’t expect it to last…