CBOE Interest Rate 30-Year (TYX.I) & S&P 100 Index (OEX.I)

Last week’s “hawkish hold” from the Fed has sent shockwaves through world markets. Traded interest rates have soared in North America and Europe, with the US 10-year Treasury Note yield climbing toward 4.60%, its highest level since 2007. Rising yields and the prospect that central banks may keep rates higher for longer have also underpinned US Dollar strength, in turn weighing down other currencies along with commodities, bonds and equities.

Selling pressure has been widespread with nearly every major country ETF that we track on the SIACharts Markets > Indices page down more than 1% in the last week. The retreat has been broad-based with none of the eleven major industry groups tracked on the SIACharts Markets > Sectors page down more than 3% with only Energy falling less than 2%.

To no surprise, the interest rate sensitive sectors, Real Estate, Utilities, and Financials have been among the most severely impacted. A look across Sector ETF charts indicates a wide variety of groups have come under pressure including Banks, Regional Banks, Homebuilders, Aerospace, Semiconductors, Real Estate, Materials, Retailers, and Semiconductors.

Fed Chair Powell speaks later today giving him the opportunity to either double down or walk back last week’s comments. For investors, its like being stuck between a rock and a hard place as continued hawkishness could support further increases in treasury yields, but a dovish turn could raise questions about the health of the economy and the risk of a recession. It’s the turn of the month and the quarter, bringing a number of key economic indicators over the next ten days including: US Core PCE inflation tomorrow, Manufacturing PMI reports from around the world on Monday, Service PMI reports and US ADP Payrolls on Wednesday and finally US and Canadian employment reports plus wage inflation numbers next Friday.

Speaking of wages, Hollywood writers and studios came to a deal this week, of which the most notable item is the first significant restrictions on the use of AI, which has been a hot topic this year. Auto Workers and actors remain on the picket lines. US politicians are working on budget details trying to avoid a government shutdown, but we have all been down that road before. The start of the new quarter also brings confession season, so far it has been pretty quiet outside of the airline sector warnings from a few weeks ago.

In this edition of Equity Leaders Weekly, we look at the significant of the current breakout by treasury yields and their impact on US equity markets.

This 45-year chart of the US 30-year Treasury Note Yield really speaks for itself, highlighting both the multi-decade downtrend in interest rates between 1980 and 2020, and the dramatic upturn in interest rates over the last two years.

TYX.I has been climbing for much of this year, but this month, gains have accelerated leading into another Double Top breakout that has signaled the start of a new up-leg and carried the 30-year yield to its highest level since 2011.

Initial upside resistance appears near the 5.00% big round number psychological barrier, which if breached, could potentially have a significant impact on investor sentiment. Previous column highs and lows suggest additional resistance points on trend may emerge near 5.40%, 6.10%, or 6.85% on trend. Initial support appears near 3.95% based on a 3-box reversal, then the previous low near 3.35%.

When evaluating market trends, investors often look at large cap stocks relative to small caps to determine whether a move is broadly based or concentrated in a small group of high-weight stocks. For most of the last year, the largest cap companies (“The Generals”) have been driving the bus and dragging the overall market higher.

Recent trading, however, suggests that The Generals are starting to falter. After soaring from April to August without even a 3% correction, the S&P 100 Index (comprised of Mega Cap US stocks), recently peaked short of its January 2022 peak and has started to roll over. In particular the completion of a bearish Double Bottom pattern and a retest of the 2,000 round number suggest that investor sentiment has turned bearish and the market has come under distribution. This appears particularly troubling since there had already been concerns that strong large cap performance was masking otherwise mediocre performance by the broader market.

Last winter, a selloff in OEX.I was contained by a long-term uptrend line that could potentially be retested near 1770, which coincides with a horizontal count. Previous column highs and breakout points suggest initial support may appear near 1,950 or 1,860. Initial resistance on a bounce may emerge near 2095 based on a 3-box reversal, or the previous high near 2160.