STOCKS LOSE UPSIDE MOMENTUM -- RISING BOND YIELDS ARE BAD FOR STOCKS
DOW FAILS TEST OF AUGUST PEAK... The Dow Industrials led the three-month rally from their October low; and may be now leading the market lower. Chart 1 shows the Dow failing to clear a major resistance barrier at its August high and now falling back to the lowest level of the new year. The Dow is the first of the major stock indexes to give back all of its 2023 gains. It has also fallen below its 50-day moving average and now appears headed for a test of its December low and its 200-day moving average. Its short-term momentum indicators in the two upper boxes are also falling sharply. That's especially true of its daily MACD lines which have fallen below their zero line into negative territory. The falling red trendline in the middle box also shows the MACD lines losing upside momentum well ahead of this week's selling. That's another sign the the Dow rally may have peaked for now.
Small cap stocks also helped lead the recent stock rally. But they too are weakening. Chart 2 shows Russell 2000 iShares (IWM) also backing off from major resistance at their August peak and are now retesting their fourth quarter highs. Daily momentum indicators in the upper boxes have also turned down. The IWM may be dropping toward a test of its moving average lines. What it does there will help determine if a more important top has been completed.
S&P 500 TESTS RISING TRENDLINE SUPPORT... The daily bars in Chart 3 show the short-term trend for the S&P 500 also weakening along with momentum indicators in the upper boxes. Although the SPX fell well short of its August peak, last week's message showed it having regained half of last year's losses and suggested that was a normal spot to expect some profit-taking. The SPX is approaching an important test of its 50- and 200-day moving averages. But it's also testing a rising support line extending back to its October low (green line). That's another important test of the staying power of the market's four -month rally. If that support doesn't hold, next support is seen at its late December low.
RISING RATES MAY CAP STOCK RALLIES... Stocks don't usually do well when the Fed is hiking interest rates to combat rising inflation. Which it's doing now. The big question is how much higher will rates go, and what effect that could have on stocks. Chart 4 compares the trend of the 10-Year Treasury yield (green bars) to the S&P 500 (black bars) over the past six months. Bond yields rose throughout 2022 and contributed to a bad year in stocks. Chart 4, however, shows a peak in bond yields last October coinciding with the start of a stock market rally that lasted for three months. The bottom box shows the 10-Year yield bottoming at its 200-day moving and rising throughout the month of February. Stock prices retreated as bond yields climbed. In other words, higher rates continue to weigh on stocks.
The chart, however, shows both markets in a testing process. The green bars in the lower box show the TNX meeting resistance near 3.90%. At the same time, the SPX in the upper box is testing a four-month rising trendline. The main message in Chart 4 is that bond yields and stocks continue to trend in opposite directions. Today's pullback in bond yields is helping to stabilize stocks. But if the upper trend in bond yields resumes, stocks may continue to struggle.
