TEN-YEAR TREASURY YIELD IS BOUNCING TODAY -- LONG-TERM CHARTS SHOW TNX IN A LONG-TERM SUPPORT ZONE AND VERY OVERSOLD -- HIGHER BOND YIELDS ARE BOOSTING BANKS AND FINANCIAL STOCKS
TEN-YEAR BOND YIELD IS BOUNCING OFF CHART SUPPORT...Global bond yields are bouncing today. The daily bars in Chart 1 show the 10-Year Treasury Yield rising 6 basis points to 1.65%. What makes that meaningful is that the TNX bounce is taking place from just above the previous low formed at the start of September. That suggests that bond yields may be probing for a bottom. Long-term charts also show the TNX in a long-term support area; and in a very oversold condition.
The weekly bars in Chart 2 show the TNX also trying to find support near its mid-2016 low. In addition, its 14-week RSI (red line) is recovering from deeply oversold territory below 30. That also supports a potential bottom in the making. So does our third chart.
The monthly bars in Chart 3 show the 10-Year Treasury Yield testing previous lows formed in 2016 and 2012 (green circles) which led to upturns in both instances. In addition, the 9-month RSI line (lower box) is the most oversold below 30 in more than a decade. That doesn't guarantee a similar upturn in bond yields. But it does suggest that the sharp decline in the TNX over the last year has been greatly overdone on the downside. Which could lead to a period of stabilization; and maybe even higher bond yields.
For that to happen, however, foreign bond yields would have to strengthen as well. As would the global economy. And that would probably require progress in the trade war between the U.S. and China. The three charts shown below, however, suggest that this would be a good spot for those more positive trends to start emerging. Higher bond yields would push bond prices lower; which would probably coincide with higher stock prices. One stock group in particular would benefit from higher bond yields.
BANKS LEAD FINANCIALS HIGHER...Financials are the day's strongest sector. The daily bars in Chart 4 show the Financial SPDR (XLF) trading back above its 50-day moving average today after recently surviving another test of its 200-day average (red arrow). The XLF/SPX relative strength ratio in the upper box turned up with bond yields in September; and has pulled back with them since then. Both are rising today. So are bank stocks which are leading the XLF higher.
Chart 5 shows the KBW Bank Index ($BKX) bouncing today at at an important chart juncture. The BKX is trying to find support around its blue and red moving average lines. The green horizontal lines also show the bank index having retraced 62% of their September rebound where new buying should resurface if they're going to recover some lost ground. They're probably going to need higher bond yields for that to happen. As you know, banks borrow short-term (from depositors) and led long-term (by making loans). They make money when long-term yields are rising faster than shorter-term yields. In other words, a steeper yield curve.
S&P 500 TRIES TO REGAIN 50-DAY LINE...Chart 6show the S&P 500 trying to climb back over its 50-day moving average. That would be an encouraging sign if it's able to do so. Higher stock prices today reflect a more optimistic market mood. So do higher bond yields. All eleven market sectors are in the green with the biggest gains in financials, materials, energy, and industrials. Defensive utilities, real estate, and staples are lagging behind. Some profit-taking in safe haven gold and tentative buying of economically-sensitive copper and oil (and their shares) also show a more upbeat mood. As do higher foreign currency markets. Chinese stocks are leading a rebound in emerging markets. I suspect, however, that most of that buying is based on hopes for some kind of trade deal between the U.S. and China. That could change very quickly if no trade progress is made.
