RISING RATES WEIGH ON STOCKS -- SMALL CAP INDEX STALLS AT AUGUST HIGHS -- ENERGY STOCKS JUMP WITH CRUDE OIL
BOND YIELDS ARE CLIMBING... Last week's message showed the 10-Year Treasury yield bouncing off its 200-day moving average suggesting that a rebound in yields might be starting. Chart 1 shows the TNX climbing above its 50-day moving average and a falling trendline extending back to its October high. That resulted in a drop in bond prices. Chart 2 shows the 7-10 Treasury iShares (IEF) falling below moving average lines to reach the lowest level in a month. That combination contributed to profit-taking in an overbought stock market.
SMALL CAP RESISTANCE... Last week's message showed small cap stocks leading the stock market rally. Chart 3, however, shows Russell 2000 iShares up against a major resistance barrier at its August peak (red arrows). In addition, its 9-day RSI line in the upper box shows the IWM reaching overbought territory over 70. That combination also contributed to this week's profit-taking. No serious damage was done to the stock uptrend. The green horizontal trendline shows the IWM remaining above initial support along its December peak.
NASDAQ PULLBACK...The Nasdaq market suffered the week's biggest loss owing mainly to weaker technology stocks which are more negatively impacted by rising interest rates. Chart 4 shows the Invesco QQQ Trust pulling back from an overbought condition, but remaining above potential support along its December peak. Energy stocks were the week's strongest sector following a rebound in the price of oil. .
ENERGY STOCKS REBOUND...Energy stocks were the only sector to gain ground this week. Chart 5 shows the Energy Sector SPDR (XLE) ending the week back over its 50-day moving average. The XLE appears to be consolidating between its November high and its December low in a potential "triangular" formation as shown by its converging trendlines. That type of continuation pattern normally suggests that higher prices are in store. An 8% jump in the price of crude oil gave a big boost to the XLE (see gray area). So did a production cut announced by Russia.
Stocks and bonds rallied over the previous three months on hopes that inflation might be dropping which might tempt the Fed to slow or halt its rate-hiking campaign. This week's jump in oil prices, however, and buying of energy shares might partially explain the jump in interest rates and profit-taking in stocks. Which is why it's necessary to keep an eye on the direction of rates. Falling yields supported the current stock rally. Rising yields could have the opposite effect.
