This Fantastic News for Stocks Was Overlooked as Fed’s Powell Stole Spotlight
Treasury yields could hold the key to a future stock rally and there's good reason to believe a run is imminent.
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On Wednesday, markets finally heard from Fed Chairman Jerome Powell and his cohorts at the Federal Open Market Committee. Stocks liked what they heard, as the S&P 500 gained just over 1%, and the Nasdaq Composite climbed by 1.5%
Hold the Champagne
Before you pop the champagne, though, investors should be aware that despite recent gains, the S&P 500 remains trapped beneath its 200-day moving average (red), currently stationed near 5,746.
Over the past three sessions, the large-cap index failed twice to close above 5,700 (black arrows). This is a resistance level that was created in late October/early November of last year (black dotted line).
The S&P 500’s 200-day moving average lines up with a 38.2% Fibonacci retracement of the February-March pullback. That retracement creates another resistance level in the vicinity of the index’s 200-day MA.
In other words, this nascent rally will soon face a thicket of resistance in the 5,750 area.
Investors should be skeptical about this rally. How can we get excited about the S&P 500 when it can’t even breach its own 200-day MA, or regain at least 38.2% of its recent pullback?
Before we buy in, this index needs to show some strength. Let’s keep our eye on the 5,750 level in the coming days, to see how the market reacts if and when it reaches that point.
The Stag and the ‘Flation
Bonds are a different subject altogether.
Last year, in response to a question about stagflation — a situation where economic growth stagnates while inflation rises — Powell cleverly noted that he didn’t see the "stag" or the "‘flation."
Fast forward to Wednesday’s post-FOMC press conference. Powell indicated that growth was slowing, while inflation remained stubbornly high.
To be fair, Powell indicated that neither growth nor inflation merited immediate concern. But it was interesting to hear him describe an economy that was moving toward stagflation without actually using that word.
Fantastic News for Stocks?
Powell may have stolen the spotlight, but sometimes charts speak louder than words. Here is one fixed income chart that can’t be ignored — check out the U.S. Treasury 10-year note yield chart:
The 10-year T-note's yield has formed a head-and-shoulders pattern (shaded yellow), with its 200-day moving average as the approximate neckline. If the neckline breaks, the yield on the 10-year could fall to at least 4%, and possibly as low as 3.25%.
This would be fantastic news for stocks, as lower bond yields would make stocks more attractive by comparison. Bond prices would also rise, as fixed-income price and yield have an inverse relationship.
Needless to say, if Treasury yields drop that low, then the odds that the S&P 500 will climb above its obstacles in the 5,750 area would improve dramatically.
At the time of publication, Ponsi had no positions in any securities mentioned.
