BOND YIELDS RISE ON MORE HAWKISH FED -- TECH STOCKS LEAD NASDAQ LOWER -- ENERGY AND FINANCIAL STOCKS SHOW LEADERSHIP

FED MINUTES PUSH STOCKS LOWER... The release of Fed minutes yesterday from its December meeting reflected a more hawkish tone which pushed stocks lower and interest rates higher.  The Nasdaq took the biggest hit owing to a big drop in technology shares which are the most vulnerable to rising rates.   Chart 1 shows the Nasdaq Composite Index falling back to its December lows where it's trying to stabilize.   So far no serious chart damage has been done.   It's important, however, for the Nasdaq to stay above those lows.    Beneath the surface,  this week's market action suggests some rotation out of high multiple tech stocks into more cyclical sectors like energy, financials, and industrials.   Energy stocks are benefitting from rising oil prices; while financials are benefiting from rising bond yields.

ENERGY AND FINANCIALS LEAD... Those two sectors have turned in this week's strongest stock performances.    That makes sense from an economic standpoint since both are linked.    Rising energy prices are one of the biggest contributing factors to rising inflation which has led to a more aggressive Fed.   It's now likely that the Fed will start raising rates in March.     Chart 2 shows the Energy Sector SPDR (XLE) rising to a new three-year high this week on the back of rising oil prices.  While Chart 3 shows the Financial Sector SPDR (XLF) testing its October high and nearing a new record.   The XLF is benefiting from this week's upward spike in bond yields.

BOND YIELDS NEAR SPRING HIGHS... Bond yields, which had already been climbing this week, got an added boost from Wednesday's Fed minutes.  And they've achieved an upside breakout.   Chart 4 shows the 10-Year Treasury yield rising above its fourth quarter high.   As a result, the TNX has risen above 1.70% for the first time since the spring.  The rising yield now appears headed toward a test of its March high near 1.76%.  Rising bond yields are obviously bad for bond prices.   Rising interest rates may also create some headwinds for stocks.