We kick off the week with stock markets going green, following up the momentum from Friday March 3rd 2023:
The main reason for this pop? We are seeing bond yields drop… for now.
Both Friday and early Monday morning (today) saw bond yields drop which supported market moves higher. However, according to the charts, the recent bond yield drops are just a pullback in an uptrend. This would suggest that the current market move is just a relief rally, or a dead cat bounce, before resuming their downtrend.
If you look at the two year yield, you will see that the daily candle for today is now green as a bid came in. Earlier it was red. The thing is, the 2 year can pullback further in order to retest the 4.70% breakout zone. As long as the 2 year yield remains above this, more new highs are possible.
The price action on the 10 year yield is worth watching. Especially since it is now testing its major retest zone after a pullback. And you can see that a bid is being printed here with a large wick candle bouncing right around the 3.90% zone. This points to yields still moving higher.
The take away for traders? Yields are technically still in an uptrend meaning higher yields can impact stock markets. If these support retest zones were to breakdown, then we would have a sign that yields will drop further, which would be positive for the stock markets.
Now I can already hear people saying, “don’t worry about yields, just buy the darn dip!”. I think this reflects the confusion, or dilemma, in the markets today. With the January 2023 CPI inflation data coming out higher than expected, it did really stall the Fed pivot or pause trade.
Traders then looked to earnings for a market move, but earnings have also been a mixed bag. Yes, Salesforce and C3.ai have had major moves, but hot earnings movers have not been regular in recent weeks.
On the other end, we have earnings from big ticket merchandise such as Home Depot, Best Buy, Target to name a few, indicating evidence of consumer weakness. From the numbers from Target, you can see that shoppers are trading down to purchase cheaper private label goods.
However, overall retail sales still remain strong. Let’s put things together: hot retail sales and higher inflation. With money velocity still high with consumers spending, inflationary pressures will still remain strong. This brings up another question: is the Federal Reserve raising rates fast enough to tame inflation?
Then you have the figures from the jobs market. It remains strong and robust, and the Fed has pointed at this to say that the economy is still strong. More importantly, the Fed still believes with a strong labor market and retail sales, it can keep raising interest rates and keep them high for longer taming inflation and avoiding a recession. The soft landing.
Keith Turner at Truist sums it up nicely:
“The recent action is very much aligned with a key market dilemma we have been highlighting: If the economy stays stronger, as we have seen recently, Fed policy is set to remain tighter, and this will weigh on market valuations. Or, instead, if the economy weakens, this will pressure profits. Neither of these outcomes are favorable for premium market valuations.”
More confusion!
While the fundamentals may be confusing the markets and traders, the technicals are still supportive for market bulls. Regular readers know that I have been highlighting major support zones on all the major US indices.
These support zones were all held on all US stock markets. Hammer candles were printed, and the following day (Friday) saw huge pops. The bulls are going long with their stop losses below the hammer lows, or below Thursday’s lows.
As long as those bond yields remain stable or head lower, stock markets will likely continue their move higher.
Just a word of caution: from a technical perspective, it is much safer to enter a long on a retest once previous highs have been taken out. This means there is still room to the upside before we get a breakout and a buy signal with a higher probability of success from a technical perspective.
But some positives I see right now for bulls, would be the European markets which are also moving higher, and many of them have broken out of their recent highs.