The abundance of “Fed speak” that we knew we’d be getting this week has indeed pushed-back on the notion that the Fed is going to pivot quickly from the tighten policy that began this year. This, along with the concerns surrounding Speaker Pelosi’s visit to Taiwan, has caused the stock market to pullback slightly so far this week. That said, the decline has been quite mild…given how much the market rallied last week…and how much it has rallied since mid-June. Therefore, it’s hard to call this week’s move anything more than a “breather” in a rally that is now almost two months long in duration. So, unless we see some more downside follow-through quite soon, the bulls are going to remain in charge over the near-term in the stock market.
The futures are trading higher this morning, but this has nothing to do with any relief from yesterday’s “Fed speak.” St. Louis Fed President Bullard echoed yesterday’s statements from other Fed officials this morning. However, we ARE getting some relief from the fact that China’s response to Speaker Pelosi’s trip to Taiwan has not been particularly harsh. Of course, this could change , but so far it looks President Xi is the one who has “blinked” in this confrontation……..From what we read, Mr. Xi is getting criticism for he lack of a response, so we’ll have to see if this situation changes over the coming days.
Even though the response to this week’s more hawkish rhetoric has only been mildly negative for the stock market, it did produce a bigger move in the Treasury market. The yield on the 10-year note jumped 8% and closed above 2.7%...and the yield on the 2yr note surged even more (so the yield curve actually became even slightly more inverted). The rise in the 10yr yield was strong enough to give it an “outside-up” day (“outside-down” day for the TLT…which measures price, not yield). As we’ve highlighted in the past, “outside days” tend to be signals of a change in trend. Given that the trend has been for lower yields, this could be telling us we’ll see yields bounce…at least for a while.
If, repeat IF, this bounce in yields does sustain itself for more than just a few days, it could be quite important. As we mentioned recently, the yield on the 10yr note had formed a “head & shoulders” pattern…and it had indeed broken below the “neck-line” of that pattern. HOWEVER, yesterday’s big bounce took it back up slightly above that line.
This means that the yield on the 10yr note has moved to a critical juncture. One of the best old sayings in technical analysis is that there are few things as bullish as a failed “H&S” pattern. Thus, if (repeat, IF) rates do push higher over the coming days and weeks…it could be telling us that we’re going to get a surprising jump in yields……If, however, yields roll back over in a significant way soon, it will mean that it is the bounce-back in yields that has failed. In other words, if the bounce in yields doesn’t push much above its old “neck-line”…and rolls back over in a material way…it would mean that the “old support” level has provided very tough “new resistance.” That, in turn, should tell us that long-term yields still have a long way to fall.
The resolution of this “critical juncture” could easily take time to resolve itself. It might take more than just a few days. However, when we DO see a move that takes the 10yr yield far enough above or below that 2.7% level to confirm which way this “critical juncture” has resolved itself…the odds will be high that the move will continue for at least several weeks (if not several months).
What we’re trying to say is that by using the term “critical juncture,” we’re not saying that the next few days will be decisive for the bond market. Instead, we’re saying that as we move through the rest of August, we should get some sort of resolution to this issue…and when we do, it should have important implications for other asset classes as well.
We’ve talked a lot about how the stock market…and several different groups/sectors in the stock market…are sitting a key junctures right now. This may sound a bit odd, but it really makes a lot of sense. These markets are all intertwined, so it should actually be no surprise that many of them are sitting at a crossroad at the same time. Therefore, the direction of the global markets are at an important juncture…and so the next few weeks should be incredibly important for the rest of this year.
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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