5 Reasons why Treasury Yields likely stall out into next week

Markets look to have turned down on schedule.  However, I suspect this won’t prove easy for Market Bears and cycles show a potential turn 8/7-8/9, which I suspect will be a trading low which then results in SPX turning back higher back above 4600.  I am skeptical 4350-4400 is reached on this initial selloff from 7/27 peaks. 

Equities have gotten down to levels that represent a poor risk/reward for shorting, in my technical view.  SPX hit 4485 before turning back to close just fractionally down on the day. This was near the high end of my support range I mentioned yesterday but there stands a chance of possible volatility over the next 2 trading days before a more convincing bottom.

Overall, this remains a short-term drawdown as part of a strong ongoing uptrend.  Dips should make US Equity indices attractive, and a trading low could materialize into early next week.

Given that most of my indicators don’t show lows to be in place until next Monday-Tuesday, this snapback might have been position squaring ahead of important earnings out of AAPL 0.73% , AMZN -0.15%  and the Friday Jobs report.

Specifically, when eyeing DeMark indicators on charts of TNX, TYX, SPX and QQQ 0.59% , these all look to be close to triggering counter-trend exhaustion. (For SPX and QQQ, I am referencing hourly charts.)

Importantly, sentiment has retreated sharply in recent days, and this week’s weakness has brought daily momentum down from overbought levels.  Thus, two of the reasons many market bears cited as to “why” stocks should decline are arguably no longer in place.

Furthermore, the rapid rate rise has caused some big underperformance out of the defensive sectors like REITS and Utilities, which tend to be sensitive to a quick surge in interest rates.

S&P hourly chart below shows prices hovering right over former peaks from June, which I suspect will offer attractive entry points for longs in the days ahead.

Short-term oversold conditions as part of an ongoing uptrend where weekly momentum remains quite bullish and not overbought anymore makes US Equities attractive on this week’s pullback.

Overall, it’s hard thinking that stock indices have bottomed just yet technically, but this looks close and should be in place by early next week.   Friday, Monday, or Tuesday could be important towards helping a low materialize, in my view.

5 Reasons why the Yield surge likely proves short-lived

1. Yields are reaching former peaks from last October which is considered strong resistance
2. Cycle composites show yields turning back lower in the back half of 2023
3. Elliott-wave patterns appear to show this yield move nearing conclusion
4. Sentiment seems very one-sided, with most now expecting yields to rise further
5. Seasonality studies show August to be the strongest month of the year out of the last 20 on average

TNX charts certainly do appear bullish on first glance, when seeing rates surge to the highest levels of the year.  However, US 10-Year Yields have already moved 40 bps within the last three weeks which has caused RSI to near overbought levels.

Given the prominence of last October’s peaks for 5, 10 and 30-year yields, it’s thought that these former highs should not be exceeded.  Technically speaking, Treasuries likely bottom out in the next 3-5 days, which points to rates peaking out, not accelerating to new highs at a time when most expect it.

DeMark exhaustion on charts of TLT and TNX means a change of trend could be near

DeMark’s counter-trend TD Sequential, TD Combo and TD Setup Counts are now present on charts of TYX, TNX on a yield basis, and are also present on daily charts of TLT (Ishares 20+ Year Treasury Bond ETF).

Daily charts below show a completed TD Buy Setup now in place for TLT.  (9 consecutive daily closes beneath the close from four days ago).

These are shown as “Green 9 counts” and were present at quite a few of the turns earlier this year in yields.

Overall I suspect that TLT does not break last year’s lows in price terms.  This looks appealing to buy after severe weakness in recent days.  Gains would coincide with yields peaking out.

Stock and bond correlation has reached the highest levels in over 25 years

As mentioned last week, the move above 4.00% in TNX and TYX served as a negative catalyst for Equities, and stocks sold off quickly as these important thresholds were exceeded this past week.

Bonds certainly don’t appear to be a good hedge for those seeking protection as stocks have fallen this week.  The one-month correlation between Stocks and bonds skyrocketed back to levels which haven’t been seen in 25+ years.

Thus, to expect stock indices can bottom out, it’s going to likely be important for this recent move higher in Rates to stall and then reverse course.

I suspect that Friday’s (8/4) economic data might serve as an initial first step in this regard.  However, it’s important for TNX to undercut 4.10% to prove that this week’s breakout could have been false.

Overall, a peaking out in yields might seem unusual given this week’s Fitch Debt downgrade along with the massive Treasury supply and technical progress coinciding with the recent BOJ decision.

However, until/unless last October’s peaks are exceeded on consecutive weekly closes, I’m expecting some mean reversion to this move in rates and a turn back to the downside.

Eventually, rates should move back to highs, but I’m skeptical that this is a 2H 2023 event.  In the short run, meaning the next 1-2 weeks, this backup in rates makes Treasuries attractive in my view.