The 5% Treasury Yield: It's Here and How It'll Affect Stocks

All summer I kept pondering the likelihood that we'd see the 10-year Treasury yield ($TNX) above 5% and, if it happened, what the impact might be. Well, we're there now, and honestly, the reaction is about what I expected.

The stock market has been providing little warning of a major top, so really the reaction has been about rotation, which is a hallmark of a secular bull market. Despite the higher rates, money is NOT leaving stocks. It's simply rotating.

There is a clear message being sent to interest-rate-sensitive stocks, for sure. The Fed wants rates higher to squash any potential for inflation to stick around. After looking at this chart, it's obvious to me that Wall Street has gotten the message.

Odds began growing in August that the Fed would reverse course and hike the fed funds rate when they met in September. The exodus out of bonds ahead of that meeting, sending the yields higher, is clear in the top panel of the above chart. And key interest-rate-sensitive areas of the stock market were pummeled, as shown in the four panels beneath the TNX.

These areas caught a break on Friday morning, when the September jobs report came in well below expectations, and yields initially tumbled. The 10-year yield, however, is battling back as I write this. I don't believe this interest rate battle is over just yet.

Two sectors have really been beaten up and could use some relief soon. Check these out on both absolute and relative bases.

The higher rates and the prospects of further hiking is having a significant impact on the areas highlighted above. But it's important to understand that the stock market usually moves higher when treasury yields are rising. That might seem counterintuitive, but it's been the history of the stock market.

What Predicts Market Tops?

Here's my point: Don't grow too bearish, because of what you're hearing and reading in the media. The truth lies in the charts. At EarningsBeats.com, we have a tremendous track record in calling major reversals in the stock market. It's not by accident. It's from following the charts, intermarket relationships, and rotation.

On Saturday, October 3rd, at 10:00 am ET, I'm hosting a FREE LiveStream event, "The Warning Signal That Appears Before Major Market Tops," and everyone is invited. I plan to discuss and show you WHAT PREDICTS MARKET TOPS. Simply CLICK HERE to register and save your seat! If you can't make the event live, you should still plan to register. All those who register will receive a copy of the event recording.

Happy trading!
Tom