RISING BOND YIELDS ARE RATTLING STOCK HOLDERS -- TEN YEAR YIELD REACHES FOUR-YEAR HIGH -- BOND YIELDS ARE RISING FASTER THAN STOCKS FOR THE FIRST TIME SINCE THE BULL MARKET STARTED -- THE VIX INDEX SURGES TO FIFTEEN-MONTH HIGH
BOND YIELDS ARE CLIMBING ... Bond yields are rising a lot faster than a lot of people expected. And that's starting to worry stock holders. The weekly bars in Chart 1 show the 30-Year Treasury Yield rising over 3.00% for the first time since last March and heading up for a challenge of its early 2017 peak near 3.20%. A close above that more important chart barrier would be very bad news for holders of long Treasury bonds which are falling. The bigger news, however, is coming from the faster rise in 10-Year yields. The weekly bars in Chart 2 show the 10-Year Treasury Yield trading at a four-year high and nearing a major challenge of its January 2014 peak near 3.03%. A decisive close above that major barrier would leave little doubt that the three decade-long bull market in bonds has ended. That's not only bad for bondholders. It may also be bad for stock holders. Current high stock valuations don't look so bad as long as bond yields stay low. They're going to look a lot more expensive if bond yields experience major upside breakouts.
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Chart 1
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Chart 2
BOND YIELDS ARE GAINING ON STOCKS ... The green monthly bars in Chart 3 plot a ratio of the 10-Year Treasury Yield divided by the S&P 500 over the last ten years. The falling ratio means that stocks have risen faster than bond yields throughout the nine-year bull market which has helped support rising stock prices. But not anymore. The TNX/SPX ratio bottomed in mid-2016 and has been rising since then (red box area). And it looks like it's bottoming along with bond yields. That means that for the first time since the bull market in stocks started nine years ago, bond yields are actually rising faster on a percentage basis than stocks. That's not necessarily a good sign for stocks. That's because rising bond yields make an expensive stock market look even more expensive. That doesn't mean that the uptrend in stocks is over. But it may be enough to slow down the market's advance and pave the way for higher volatility as the year goes on. We're already seeing signs of that today.
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Chart 3
VIX INDEX SURGES TO FIFTEEN-MONTH HIGH... Chart 4 shows the CBOE Volatility (VIX) Index surging to the highest level since late 2016. The VIX has also risen above a falling resistance line extending back to the start of 2016 (when the last 10% correction in stocks ended). Today's sharp upturn in the VIX is being accompanied by big stock losses. Chart 4 suggests that the period of record low stock market volatility may be coming to an end. I suspect that has something to do with the era of historically low interest rates coming to an end as well.
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Chart 4
S&P 500 IS HEADED TOWARD TEST OF 50-DAY AVERAGE ... Chart 5 shows the S&P 500 falling below its 20-day average today (green line) which puts it on track to retest its 50-day average (blue circle). That lower support line hasn't been touched since last August. The black trendline drawn under August and November lows may also be retested. My Wednesday message suggested that the market was overdue for a pullback. It looks like we're finally getting one. Today's 2.9% yearly jump in January job wages may be raising fears of a more aggressive Fed because it could lead to higher inflation. That may also be supporting rising bond yields.
