Tuesday, September 3, 2013

Interest rate pressure still being felt

The issue of the week for the financial market is the continued strength in the 10-year Treasury yield.  The 6% intraday rally in the CBOE 10 Year Treasury Note Index (TNX) on Tuesday made its presence immediately felt by putting a damper on an early stock market rally attempt.  What began as a 130-point rally for the Dow 30 index was quickly reversed by noon on Tuesday when the Dow gave back nearly all its gains thanks to the TNX rally.

The 6% TNX rally also caused an increase in the number of stocks making new 52-week lows on the NYSE.  By 12:30 on Tuesday that number had risen to 50, a sign that internal selling pressure is still a problem for the stock market.

There are preliminary signs that the rally in interest rates may soon reverse, at least temporarily.  Consider for instance that a recent Bullish Consensus poll for Treasuries hit a 1-year low of 21%, a level commensurate with past bond market bottoms (and yield peaks).  There are negative divergences in a number of technical indicators, such as the MACD indicator shown below.

A short-term reversal of the uptrend would be signaled by a close below the 30-day moving average shown in the above chart.  It must be emphasized, however, that as long as TNX remains above the rising 30-day MA the dominant short-term trend for the Treasury yield remains up.  A reversal of the TNX rally would be most welcome and would at least temporarily remove the recent pressure from equities.