We find it interesting that the stock futures are trading meaningfully higher this morning given that we cannot find any new-news on a fiscal deal. The S&P futures are basically signaling that they’ll claw back everything the S&P lost on Friday. That would indicate that the President’s Covid-19 will not have an impact on the election...and that the hopes that appeared about a fiscal deal last week will indeed come to fruition soon. We’re not convinced that either one of those assumptions are the right one, but the stock market seems to be able to look past a lot of negative intermediate concerns. If the market can assume that a fiscal plan will be passed eventually...and that we’ll get a vaccine eventually...and that a second wave of the virus will end eventually...maybe the stock market can rally enough over the next month to give Mr. Trump another surprising victory on Election Day.
Bond yields are moving a bit higher this morning...as the yield on the U.S. 10-year note has moved back above 0.7%. Of course, this is not a major rise in yields by any means, so we don’t want to make too much of this development. However, as we have highlighted several times in recent weeks, the Commitment of Traders (COT) data continues to show that the net long positions on the 10yr note for the dumb money “specs” remains quite high. So if/when they begin to unwind those positions, the price on that bond will fall...and yields will rise further. (On top of this, as we highlighted in our weekend piece this weekend, we’ve seen an interesting increase in options activity in the TLT...that is betting on higher rates between now and December.)
If (repeat, IF) long-term interest rates DO continue to rise...and the rise becomes more compelling...it doe not necessarily mean that the stock market will go down. Yes, low rates have been a justification for a higher accepted multiple on the stock market, but if a rise in rates is something that signals an improving economy (and not any problems in the credit markets), the stock market could indeed rally as those rates move higher.
We’re using the word “if” a lot today, so we are obviously not pounding the table on the possibility that this scenario will playout. However, if rates do indeed rise...and the stock market can rally in the face of that kind of move...it should be very positive for one beaten-down group: the banks. We highlight this possibility because the KBE bank ETF and the KRE regional bank ETF both saw “outside-up” days on Friday. (Remember, an “outside-up” day is one where an asset trades lower than the previous day’s lows...higher than the previous day’s high...AND closes above its previous day’s high.) Outside days are frequently signals of exhaustion of a present trend...and thus a reversal of that trend. Therefore, Friday’s action just might be telling us that the we are finally going to see a period of outperformance for the bank stocks.
We are a long way from declaring that investors should start buying banks hand over fist. In fact, there are still many reasons to think that the banks are going to have a tough time outperforming over the longer-term (starting with the continued rise in bankruptcies), but that does not mean that the bank group cannot see a “tradeable” period of outperformance over the intermediate term. However, we’re going to have to see more upside follow-through in the group (and almost certainly, more upside movement in long-term rates) before we can become more confident that a nice rally for the bank stocks is in the offing.
Looking at the chart of the KBE below, it shows the outside day from Friday we’re talking about. It also shows that the KBE has formed a “descending triangle” pattern. This pattern is usually a set-up for a decline, BUT if it can break meaningfully above the upper line of that formation (the downward sloping line), it can be quite positive. Therefore, we’ll be watching to see how this triangle pattern resolves itself over the coming days an weeks. Of course, if the KBE reverses lower soon...and takes out the bottom line of that pattern of $28.15...it’s going to be quite bearish, so we need to watch this situation very, very, very closely going forward........(BTW, the chart for the KRE is almost exactly the same as the KBE.)
As for the chart on the yield on the 10-year Treasury note, we’re going to have to see it move above the late August highs of 0.75% at the very least for the above scenario to play-out. However, it will have to move towards the June highs of 0.9% before it would have a material impact on the bank group in our opinion...and probably have to break above that level to give investors confidence that the rise can be sustained for a material period of time.
Needless to say, a move above 0.9% would not be a major long-termdevelopment. A situation where interest rates were testing 1% would still leave them VERY low on an historic basis...and barely be a blip on the long-term radar screen for bond yields. However, it would still be a move of more than 25%...and therefore, it could/should have a positive impact on the bank stocks (whose correlation with rates has been very strong this year).
Yes, a rally in the banks stocks would fly in the face of our continued cautious stance on the broad stock market...and rise in rates would fly in the face of our concerns about a slowing in the trajectory of the economic rebound as well. However, we’ve been wrong before and we’ll be wrong again...so we are always looking for situations that could surprise most investors (and thus help some investors make some very nice profits). With this theme in mind, we’ll be watching the yield on the 10yr note and the action in the bank stocks VERY, VERY closely as we move through October.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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