While everyone is focused on AI, they are missing the fact that the bond market still sees hikes, not cuts.
Meanwhile, breadth is sending a mixed message based on new highs and new lows. At the same time, credit spreads continue to diverge.
There is confusion everywhere.
S&P 500 and NASDAQ 100
Both indices have their uptrends intact as prices remain above rising 60‑week moving averages. The S&P 500 remains in the consolidation we have been highlighting, while the NASDAQ 100 looks slightly worse.
Source: Optuma
Interest Rate Expectations
The black line is the Two‑Year Yield. The blue line is the Effective Federal Funds Rate.
What this tells us is that despite a lower‑than‑expected inflation print last week, the market still sees rate hikes in the cards, not cuts. In fact, with a spread of 53 basis points, a case can be made that two hikes are still baked into the market.
Source: Optuma
Commodities
If you do not want to take the bond market’s word for it, perhaps you will believe commodities. The iShares S&P GSCI Commodity‑Indexed Trust has rebounded above a rising 200‑day moving average to retake the 50-day moving average.
That is not exactly a signal that inflation pressures have disappeared.
Source: Optuma
NYSE New Highs and New Lows
All of the above is playing out as the equity market moves into a state of confusion. In a strong bull market, we expect to see a lot of new highs and very few new lows. In a strong bear market, the opposite is true.
Over the past week, we have seen an increase in both. We discussed this back in May, and it is worth bringing back to the forefront because it is a sign of confusion beneath the surface of the market.
If it is not resolved soon, the odds of the bull market continuing begin to decline.
Source: Optuma
Credit Spreads
In the credit market, CCC and Below spreads continue to move higher while High Yield spreads trade near their tightest levels.
So the credit market remains confused as well.
Remember, this has AI implications. A meaningful portion of the AI buildout has been funded with borrowed money.
Source: Optuma
Final Thoughts
Everyone seems convinced that AI is the only story worth watching, but the bond market sees hikes, not cuts, commodities are behaving as if inflation remains an issue, breadth is sending mixed signals, and credit spreads are diverging.
The key takeaway is that higher rates, due to stubborn inflation, are a headwind to many stocks leveraged to the AI theme.
