T-Note Yields and Stock Market Correlation: Another Turning Point?
Tom Aspray from The Viper Report suggests that we are close to another significant turning point, as shown by the summer correlation between T-Note yields and the stock market.
The FOMC announcement is looming and the markets are on edge. Last week's strong price gains have pushed the US stock averages higher, but I warned that the Dow Jones Industrial Average was getting very overbought. Now, with the announcement just hours away, it's anyone's guess what will happen.
The recent rally in the stock market has caught many analysts by surprise, but it may not be as sustainable as it appears. According to the technical indicators on the weekly chart of 10-Year T-Note Yields, yields have already reached a short-term high. The eight-week decline in yields from 3.483% to 2.535% has supported the stock market rally, but it may not last much longer. Once yields start to rise again, the stock market may correct.
The market began to show signs of stabilizing in early August, with yields bottoming out and breaking their downtrend. However, this was only a temporary respite, as the S&P 500 peaked a few days later and then began a two-month decline. The market finally hit its low point in October, before beginning to recover in the following months.
The recent decline in yields has corresponded to the recent stock market rally, indicating that the market is still bullish. However, yields are beginning to show signs of topping, which could mean that the rally is coming to an end.
The 20-period EMA of yields is on the rise, and yield closed higher on Tuesday at 4.055%. This suggests that a rally back toward the prior high or even new highs is possible, with monthly pivot resistance at 4.419%. There is further chart resistance at 4.474%. However, if the 10 Year yield closes below 3.844%, then yields have completed a short-term top.
I believe that the 2-Year T-Note Yields will continue to surge in the short-term, potentially reaching the monthly R1 target at 4.764%. This would be a significant increase from the current yield of 4.268%, and would be a clear sign that the bond market is bullish on the prospects for the economy.
I believe that the 2-Year T-Note Yield will lead the market lower, with a daily close below 4.258% indicating that yields are set to decline even further. This should be positive for the stock market, although a top could take another week or so to form, or it could happen this week if yields close sharply lower.