TEN-YEAR BOND YIELD NEARS UPSIDE BREAKOUT -- NEXT UPSIDE TARGET COULD BE 2007 HIGH
TEN-YEAR YIELD TESTING OCTOBER HIGH... Last week's message suggested that rising bond yields (along with rising energy prices) was one of the factors that could push an overbought stock market into a downside pullback. More on that shortly. The big story of the week, however, was how much higher bond yields could climb. The daily bars in Chart 1 show the 10-Year Treasury yield in the process of testing its previous high formed last October. A Friday pullback prevented an upside breakout from taking place. But the major trend of the TNX appears to favor higher bond yields. Chart 2 suggests how much higher they might rise if last October's high is taken out.
A LONGER RANGE LOOK AT YIELDS... The monthly bars in Chart 2 show that the long-term downtrend in bond yields has reversed to the upside. And it shows the 10-Year yield testing its high formed last October. If and when that high is exceeded, that would put the TNX at the highest level since 2007. And the high formed that year would become a potential upside target. The red circle shows that high to be above the 5.00% level (5.31% to be exact). That big a move raises the risk for stocks which usually don't do well in a rising rate environment.
MONTHLY SECTOR RANKING... Chart 3 ranks the eleven S&P 500 sectors since mid-July when bond yields started rising. Not surprisingly, energy has been the market's strongest sector over the last month as energy prices started rising. As suggested last week, rising energy prices have been one of the factors pushing bond yields higher. At the same time, technology stocks have been the market's weakest sector. That makes sense since tech stocks are usually negatively impacted by rising bond yields. Their divergent trends are shown in the two charts below.
ENERGY STOCKS LEAD... The daily bars in Chart 4 show the Energy SPDR (XLE) maintaining its uptrend after exceeding its April high which is now providing support. The rising solid line which plots the XLE/SPX ratio shows energy leadership over the last month (along with rising energy prices). Fears that rising energy may boost inflation numbers is one of the factors pushing bond yields higher. That's not good for technology shares.
TECH SHARES WEAKEN... The daily bars in Chart 5 show the Technology SPDR (XLK) losing ground over the last month as bond yields (and energy prices) turned up. The falling red line plots the XLK/SPX ratio which shows relative weakness in that sector. The chart also shows the XLK falling below its blue 50-day average. That confirms that its short-trend has turned down. The good news is that the XLK is finding some support at its green 100-day average. What happens from here may depend on the direction of bond yields.
Seasonal factors may also account for some of the recent stock selling. As shown last week, August and September are usually the market's weakest calendar months. That may also keep stocks on the defensive.
