CBOE Interest Rate 10-Year (TNX.I) & Russell 2000 Index (RLS.I)

Equity markets in North America and around the world have roared back to life in the last week. Major indices in several countries have staged breakouts this week including the US, Canada, Australia, Germany, Taiwan and Spain. Hong Kong, Japan and the UK continue to lag behind a bit. Despite Australia raising interest rates earlier this month, and Moody’s downgrading the outlook for its US credit rating, investors have decided to focus instead on signs of inflation pressures easing, particularly in the US and the UK, better than expected retail sales reports from the US and China, and a strong start to US retail earnings season. Despite continuing comments from central bankers about the fight against inflation not being over, investors appear to be more confident, with market action suggesting to traders that central banks are pretty much done raising rates and could potentially cut rates in future. The 10-year US treasury Note Yield has dropped back to 4.50% after peaking near 5.00% just a couple of weeks ago.

The CBOE Volatility Index, aka The VIX, has also dropped off sharply, indicating a significant increase in investor confidence this month. Recent breakouts in emerging markets, small cap stocks, including a 5%! gain for the Russell 2000 yesterday, and alternative currencies like Bitcoin suggest an increased appetite for risk among traders. Based on the above themes of falling interest rates, increased investor confidence and strong retail sales, it comes as no surprise that the strongest relative sectors gains lately have come from interest sensitive groups (Banks, Utilities, Real Estate, Homebuilders), Technology, and Retailers. Despite a bounce in the price of Natural Gas this week, Energy stocks continue to struggle along with the price of Crude Oil. The coming week is broken up by the US Thanksgiving holiday on Thursday the 23rd. historically this has meant lighter trading from about midday Wednesday through the shortened session on Black Friday. Economic data slows down with most of the scheduled reports focused on the housing sector. Canadian inflation numbers are also on the way, plus Flash PMI reports later next week. Non-retail earnings are concentrated early in the week headlined by Nvidia and computer manufacturers Dell and HP on Tuesday. The retail sector may remain in the spotlight for the next two weeks. Retailer earnings season continues with headliners including Walmart, Macys and Gap today, then Best Buy and Nordstrom on Tuesday. Later in the week, focus turns to holiday season sales with investors looking for info on mall and online traffic through Black Friday and Cyber Monday, the busiest shopping days of the year stateside. The coming week also brings retail sales reports for the UK and Canada.

In this edition of Equity Leaders Weekly, we take a look at the wide ranging implications of the recent drop in treasury yields, and what a turnaround in the Russell 2000 small cap index is telling us about market breath.

The 10-year US Treasury Note Yield (TNX.I) has changed course significantly over the last two weeks. TNX.I had steadily climbed up from near 3.25% back in the spring to a recent peak near the 5.00% round number psychological barrier.

In the last two weeks, having gone up like an escalator, TNX.I has gone down like an elevator, quickly falling back toward 4.50%. A bearish Double Bottom breakdown has signaled the start of a new downswing.

This retreat has sent shockwaves across asset classes, igniting an equity market rally, ending a previous US Dollar rally and enabling bonds to bounce. Within equity markets, this drop has lifted the lid off of interest rate sensitive sectors, sparking rebound rallies in Financials, Homebuilders, Real Estate and Utilities.

So far, TNX.I has moved down 11 rows of Os in a 1% chart, which is just over half of the 18 and 20 row pullbacks seen in November-December of 2022 and March of this year. A similar retreat in magnitude would suggest a potential retest of support in the 4.00%-4.20% area. Initial resistance appears near 4.65% based on a 3-box reversal and a retest of the recent breakdown point.

The Russell 2000 Small Cap Index (RLS.I) is commonly utilized by investors as an indicator of risk appetite/tolerance among investors and for breadth confirmation of market trends.

Three weeks ago, in the October 26th edition of the Equity Leaders Weekly, we lamented that small caps were underperforming relative to the “Magnificent Seven” as we saw a high concentration of gains in a few big caps as a cause for concern.

Since the start of this month, the equity market bounce has been steadily broadening. Although it started with large cap names, this week, small caps have joined the rally, a positive sign indicating increased breadth to the current rally.

Earlier this month, RLS.I successfully tested sideways range support at the October 2022 low near 1646.35. Since then, the index has been bouncing back with a bullish Double Top breakout signaling the start of a new upswing. Next potential upside resistance tests appear at previous column highs near 1911.38 and 2028.97. Initial support appears near 1713.20 based on a 3-box reversal.