Yields at the Wheel: Interest Rates Still Driving Market, with Dip Helping Tech

The benchmark 10-year Treasury yield has risen seven consecutive weeks, and it’s this number that could continue being the day-to-day force driving equities higher or lower. Existing home sales due later this morning, and Powell heads to Congress tomorrow.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Volatility ahead of vaccine rollout, stimulus
5 min read
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Key Takeaways

  • Nasdaq strong overnight, supported by dip in 10-year Treasury yield below 1.7%

  • AstraZeneca’s U.S. vaccine trial results are positive, providing early support

  • Fed Chairman Powell, Yellen, to discuss stimulus with Congress Tuesday

(Monday Market Open) After a bumpy finish Friday, the road feels smoother as we start the final full week of Q1. This easy cruising might not last, however, with another appearance from Fed Chairman Jerome Powell on tap tomorrow. 

Some positive vaccine news and a dip in Treasury yields provided early support, though it wasn’t spread evenly. The Nasdaq (COMP) had a strong overnight session, led by big gains in Tesla (TSLA), while other major indices were basically flat. U.S. trial results from AstraZeneca (AZN) looked good and the 10-year yield is back under 1.7%, though knowing what we know about yields, don’t get too comfortable with that. The yield rally has been relentless this year, but sometimes takes small breaks. 

Yields could be back in focus tomorrow and Wednesday as Powell takes his show on the road in front of Congress. He’ll have company from Treasury Secretary Janet Yellen as both of them discuss the impact of stimulus. Volatility is a little lower this morning but that could change quickly tomorrow as Powell speaks, so be ready.

There was some merger action over the weekend in the railroad sector, where you don’t often see deals because there are so few big companies. Kansas City Southern (KSU) shares are up double-digits in pre-market trading after Canadian Pacific (CP) agreed to buy them in a $25 billion transaction that would create the first freight-rail network linking Mexico, the U.S. and Canada. It’ll be interesting to see how these railroads and other transport companies might be affected if we get infrastructure legislation out of Congress. 

“Buy the Dip” Could Still Factor In

Taking a quick look at the scorecard, the Russell 2000 (RUT) small-cap index still leads all indices this year with 15% gains. The COMP brings up the rear, up just 2.5%. Despite the weak performance of COMP so far this year, “buy the dip” sentiment might still factor in for many Tech stocks.

At the same time, there doesn’t seem to be much appetite for the big Tech names at much higher prices, and there’s still a lot of volatility. That’s not necessarily a weather report the most bullish investors might want to hear, but for now, it tells you to keep your emotions in check. And that’s not a bad thing, when you consider the possible consequences of letting feelings dictate your trading. 

Window-Washing Season is Here

We’re heading into the “dog days” of the quarter, the final week when earnings are light. It’s also a time when you traditionally see some “window dressing” where fund managers try to load up on stocks that worked during the quarter and toss out a few that didn’t. Between this and the lack of corporate news, the market might be volatile this week and into next.

Volatility didn’t show up too much at the end of last week, however. The Cboe Volatility Index (VIX) barely kept its head above 20 after closing below that a few days earlier for the first time in more than a year. It’s just above 20 this morning, a level it’s often bounced off of the last few months.

It did feel a bit like the dog days Friday, with slow trading and little movement in the major indices. Tech and small-caps rebounded a bit after the COMP got crushed on Thursday, but the Dow Jones Industrial Average ($DJI) took a beating as bank shares fell. 

That might have been a bit reflexive when you consider how strong the Financial sector has been. An announcement from the Fed that it wouldn’t extend a temporary rule relaxing bank capital requirements got blamed, but many investors might have been looking for an excuse to sell and hitched onto that. We might see more pressure on the sector today with yields down. 

This is really an interest rate-driven market, and the question is whether we continue this slow march upward in yields. The 10-year yield has risen seven consecutive weeks, putting a lot of pressure on Tech and helping Financials. If yields do start leveling out, that could help the Tech sector get its feet back on the ground. 

Is the Energy Sector Running Out of Gas?

Another sector that’s had a great run but got knocked down hard last week was Energy. The sector got smacked Thursday when crude fell 7% in one day amid growing European virus fears and rising supplies. OPEC and Russia haven’t opened the taps, but U.S. producers have, and that could provide more pressure in coming weeks, especially with stockpiles here already 6% above the five-year average. 

Energy stocks rebounded slightly Friday, but not enough to make up for a pretty ugly week when they fell more than 7% overall. People who loaded up on oil and gas stocks this year can’t really complain, however, with the sector up more than 25% over the last three months to top the leaderboard. 

Crude is up just a bit this morning, trading near $61, so we’ll see if it can hold the $60 level or test recent highs near $65 again. 

Data Watch

Some other numbers to monitor this week besides crude stockpiles include today’s report on February existing home sales—which analysts see coming in at a seasonally-adjusted 6.5 million, down from nearly 6.7 million in January—and tomorrow’s on new home sales. 

Another key data point is personal consumption expenditure (PCE) prices on Friday, which might get more attention than usual in this inflation-obsessed climate. Traders and pundits are still buzzing about Powell’s press conference last week where he basically said the Fed would take a hands-off policy even as it expects prices and economic growth to rise to levels we haven’t seen in quite a while. 

There’s a concern that the Fed might get put in a position where things get out of hand and it has to scramble. That’s an unlikely scenario, but one few would want to see. While the Fed assures us it has tools to intervene if necessary, that didn’t seem to reassure fixed income traders, who sent the 10-year Treasury yield to new 14-month highs last week. The yield ended above 1.7% on Friday, and has marched up about 80 basis points since the start of the year.

philadelphia semiconductor index

CHART OF THE DAY:  YIELD CURVE STEEPENS. After last week’s Fed meeting, the spread between 2-year and 10-year Treasury rates (the “2/10 spread”)—often seen as a proxy for the slope of the yield curve—moved to its highest level since July 2015. The central bank reiterated its commitments to keep the Fed funds rate at 0-0.25% for an extended period as well as allow inflation to run hot. Recall that the 2/10 spread traded negative for a brief period in the summer of 2019. Data source: Federal Reserve’s FRED database. Image source: The thinkorswim® platform. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Long Road to Nowhere: Considering how far things have come this quarter, they’ve basically been stuck in place. Not making sense? Well, consider this: As of Friday, the Nasdaq 100 (NDX) was down year-to-date by less than 1%. That’s pretty amazing when you consider that at one point, on Feb. 16, to be exact, the NDX was up nearly 8% from the start of the year, and at another (on March 5), it was down more than 5% from Dec. 31. So basically the NDX (which includes some of the biggest Tech and Communications sector stocks), has made a long up-and-down journey to nowhere so far in Q1. That’s something to consider, because it reminds you not to get too sunny when things perk up or too down in the dumps when the market heads toward “palookaville,” to use an old movie term.

Tech Talk: On a technical basis, stocks start the week with a bit of support thanks to the S&P 500 Index (SPX) falling below 3900 intraday on Friday and then recovering to finish the week above that. The late move might inspire some follow-through technical buying today, but nothing’s guaranteed. 

Trading was pretty orderly Friday despite quadruple witching, and a lot of the selling pressure likely had to do with people closing out positions. Volume was higher than average, as you might expect on a “witching” day. 

The SPX set new all-time highs last week, but fell short of 4000. It’s basically been range-bound almost all year, trading mainly between 3725 and 3950. The low point of that range now matches pretty well with the 100-day moving average, but closer support is at 3900 and below that there may be more support at an old resistance point near 3850, which lines up a little below the 50-day moving average. 

Lumbering Up: Though the official inflation data continues to look benign, some analysts argue higher prices are starting to take a toll on certain industries, notably housing. Lumber prices are at record levels and have added $24,000 to the cost of a new home, according to the National Association of Home Builders (NAHB). “Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month,” the NAHB said this week. 

Maybe this is starting to factor into the economic data. February housing starts released last week were below analysts’ expectations and down 10.3% month-over-month. It was the second straight month of decline. Some of that likely reflects February’s storms in Texas, but building permits (which don’t reflect weather as much) also fell, Briefing.com pointed out. That makes some analysts wonder if rising materials costs could be clamping down on demand. Supplies of new homes remain low and prices are at all-time highs, so if building slows down, that has the chance of making housing even less affordable. However, home builder Lennar (LEN) shares soared on better than expected earnings last week. So new homes must be affordable for some.

Good Trading, 

JJ

@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Nasdaq strong overnight, supported by dip in 10-year Treasury yield below 1.7%

  • AstraZeneca’s U.S. vaccine trial results are positive, providing early support

  • Fed Chairman Powell, Yellen, to discuss stimulus with Congress Tuesday

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