STOCK INDEXES HOLD 200-DAY LINES -- VIX INDEX RETREATS -- TWO-YEAR YIELD HITS 16 YEAR HIGH
STOCK INDEXES HOLD 200-DAY LINES...After a weak month of February, major stock indexes are finally attracting some new buying. More importantly, this week's rebound is happening at some important moving average lines. Chart 1 shows the Dow Industrials bouncing off potential chart support along its late December low and its 200-day moving average (red arrow). That keeps its sideways trading range intact. Chart 2 shows the S&P 500 scoring an upside reversal from its 200-day line on Thursday and gaining more ground on Friday. The SPX is also back above its 50-day average which remains above its 200-day line. Chart 3 shows the Invesco QQQ Trust bouncing off its 200-day average as well. Small cap stocks also held above an important moving average line.
SMALL CAPS ALSO HOLD SUPPORT...Small cap stocks have been one of the strongest parts of the market over the past few months. And are also holding up better than larger stocks. Chart 4 shows Russell 2000 iShares bouncing off their blue 50-day average to keep its intermediate term uptrend intact. Small cap leadership is usually a good sign for stocks. That's because they usually lead the market during rallies.
LOWER VIX BOOSTS STOCKS...Another factor supporting this week's stock rebound has been the retreat in the CBOE Volatility (VIX) Index. [That's because the VIX usually trends in the opposite direction of stocks]. Chart 5 shows the VIX remaining below its red 200-day average and falling below its 50-day average at week's end. The VIX had risen to a two-month high in the middle of February which threatened the stock market rally. The week's drop below 20, however, has strengthened the market's short-term trend.
TWO-YEAR YIELD KEEPS RISING... From an intermarket perspective, the biggest threat to stocks is rising interest rates. And there's no sign of that getting any better. Chart 6 shows the Two-Year Treasury Yield rising to the highest level since 2007. That's the highest level in sixteen years. That's due to a more aggressive Fed that is continuing to raise short-term rates to bring inflation under control. Longer term bond yields are also rising but at a slower pace. The ten-year yield rose above 4% during the week. The fact that short-term rates are rising faster than long term rates is also pushing the ten year - two year yield curve to another multi-year low which puts it at the most inverted level in twenty years. An inverted yield curve (with shorter yields higher than longer yields) usually warns of an economic recession which is usually bad for stocks. A pullback in rates on Friday was one of the factors helping stocks end the week on a stronger note. Rising rates, however, present one of the biggest threats to the market's longer term trend.
