On Wednesday, the focal point for most investors was NVIDIA’s eagerly anticipated earnings report released after market close.

However, two events happened earlier in the day that had perhaps even greater importance.

The first was the treasury bond auction of 20-year paper which, once again, did not go well.

The auction had a record tail of 3.3bps, with foreign bidders dropping to under 60% from 74% in November, and dealers left with 21% of the auction, double the November level. (A “tail” is the difference between the average and cutoff prices, meaning buyers got bonds at lower prices, i.e. higher yield, indicating weak demand).

I have written in the past that the ability of the U.S. to continue to fund its record deficit at favorable interest rates is critical, especially as interest costs on the debt become increasingly higher.

Reaction in the bond market was negligible. At present, the long-bond futures remain in a trend channel lower (rates increasing).

The second event was the Fed releasing the January FOMC meeting minutes, which reaffirmed the “higher for longer” theme and begs the answer to what will it take for the Fed to loosen its policy.

Regarding the economic outlook, participants judged that the current stance of monetary policy was restrictive and would continue to put downward pressure on economic activity and inflation.

However, they remained concerned that elevated inflation continued to harm households, especially those with limited means to absorb higher prices. Thus the Fed remains in a wait-and-see mode.

“The coming months should reveal whether the recent inflation stickiness is a one-off… we cannot rule out that progress on inflation is stalling… If keeping policy rates at current levels for longer is not going to do the job, the FOMC might even have to think about hiking again.”

The yield on the highly watched Ten-Year U.S. Treasury displayed little reaction but remains within a well-defined channel higher.

None of this seems to have mattered though, as the blowout quarterly earnings from NVIDIA Corporation garnered all the attention.

NVIDIA reported fourth fiscal quarter earnings that beat Wall Street’s forecast for earnings and sales and stated revenue during the current quarter would be better than expected, even against elevated expectations for massive growth.

Here are the numbers:

• Earnings per share: $5.16 adjusted vs. $4.64 expected
• Revenue: $22.10 billion vs. $20.62 billion expected

This has sent the stock flying, up nearly 15% today alone.

The challenge of the current market is stocks like NVDA appear to be more the outlier vs. the “average” stock.

The semiconductor bullish percent is currently in a column of O’s meaning that demand has been weak for the sector as a whole.

And when looked at on a relative strength basis vs. the S&P 500, the sector has also not displayed superior relative strength as one might expect.

Divergences remain with one example being the cumulative advance-decline for the Nasdaq 100. Yes, the index is flying higher, but it appears to be doing so with fewer stocks.

The issue here is that META and NVDA account for almost 70% of this year’s gains.

Meanwhile, the percentage of stocks above their 50-day moving average have weakened as this indicator has decoupled from the benchmark.

But this fact doesn’t seem to be bothering portfolio managers who have bought into the trend that is perceived to have no ending.

The question that begs to be answered is will asset managers begin to cash in on their gains or continue to press this trade to the long side.

Right now, no one seems concerned about the downside, which is probably why everyone should be.

Until next time,

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