Analysis, Perspective, Trading Strategy
At the Edge of Chaos: Bond Yield Breakout Will Likely Fuel Acceleration of Stock Prices
Duarte in the Money Options
Anyone, myself included, who thought the stock
market might crash last week now knows that the Fed’s QE is at the
moment in full control of trading behavior as once the dust cleared
from the “Reddit short squeeze,” it was back to business as usual.
Of course, the whole thing was disturbing and highly inconvenient,
but as stock traders the key is to stay with the trend, so we stay
Last week it was all about Reddit “trading hordes” making hedge funds
sweat, and fears that a major player would fold as margin calls would
rain down and create a liquidity crisis. And while the scenario was
plausible, and the markets may again be tested by liquidity worries
in the future, this time was not THE TIME.
In fact, just as every other TIME in the last four years when we’ve
had major volatility in the stock markets eventually the dip buyers
came in buoyed by the notion that the Fed will keep on putting money
into the banking system and stocks will once again rise. And guess
what? They were right once again and bought stocks aggressively. So,
we’re off to the races again.
Of course, each new rally after a significant fright is different.
In fact, it would seem logical that this time may be even more different
than prior scare induced declines as the events that unfolded created
just enough volatility to change the playing field in terms of who
won and who lost. Moreover, bond yields continue to creep higher and
nothing awful seems to happen to stocks; a significant departure from
historically similar episodes prior to March 2020, as I will describe
in detail just below.
So here is the unfolding new set of trends in the complex system
known as MEL, the complex system comprised of the markets (M), the
economy (E), and people’s lives (L):
- Bond yields are still creeping higher and stocks don’t seem to
- PMI and ISM data continue to document supply chain problems leading
to inflationary pressures in commerce which is contributing to higher
- Demographic shifts in housing, employment, and working environments
are not likely to reverse anytime soon as people move from large
metropolitan areas and continue to work from home while housing supply
tightens and builders can’t keep up with demand
- The Fed’s QE will keep the stock market on an upward trend while
- Decreasing supply of key materials and consumer goods in the presence
of high levels of monetary accommodation are by definition inflationary
– just go grocery shopping
- Sector rotation will lead to emergence of new leadership in the
- Sector leadership will rotate more often than in previous cycles
as events periodically rattle markets
Can Rising Bond Yields Extend the Bull Market in Stocks?
I have been focusing on the rise of the U.S. Ten Year Note yield
(TNX) for the past few weeks, primarily because most long-term mortgage
rates are based on this benchmark. And since housing remains a central
cog in what is now what seems to be a fledgling post COVID transition
influenced U.S. economy this makes sense in terms of MEL.
Yet, as the 1.15% area, which was important resistance, and is now
important support, is critical to TNX, an equally important yield is
that of the U.S. 30 Year Treasury Bond (TYX), which is now nearing
the 2% area. This is because TYX is extremely sensitive to inflation
pressures, which is why the 2% resistance area is crucial to what happens
next. In other words, breaches of these two key resistance levels will
affect both the housing market and inflationary expectations. The only
question is how.
As a result, the big question is what will happen to stocks and the
housing sector when bond yields breach these critical yield resistance
areas? Here there are two possibilities:
- Stocks will fall or stocks will rise
- The housing market will heat up or screech to a halt
And while traditional relationships would suggest that stocks would
fall and housing will collapse in response to rising bond yields, and
they certainly may since, as the chart clearly shows this was the way
things worked prior to March 2020; it is now possible and even likely
in the current environment that a breach of nearby resistance in bond
yields could lead to accelerated bond selling which in turn would lead
to more bond money being allocated to stocks, primarily as an inflation
hedge while simultaneously juice the housing market as tight supplies
and supply chain constraints for new building create a seemingly never
ending cycle for higher home prices and higher demand.
I know it sounds implausible. But yet, it’s irrefutable, at least
for now that bond money is moving into stocks and that the housing
sector is on the rebound. Just look at the chart. Higher bond yields
are fueling the advance in stocks, have been doing so since March 2020,
and seem likely to continue do so in the foreseeable future unless
the Federal Reserve changes its current stance on QE.
In fact, as the chart directly above clearly shows, since the March
2020 bottom in stocks, the S & P 500 (SPX) has been marching nearly
in lockstep with the change in bond yields. Indeed, this is fairly
clear evidence that the rally in stocks has been fueled by money coming
out of the bond market. Moreover, since it coincides with the Fed’s
QE acceleration it suggests that the market has been pricing in inflation
since the Fed started its QE maneuvers after the COVID crash in March
What it all boils down to is that the market now believes the Fed’s
maneuvers and the changes in MEL will be inflationary. Even more interesting
is the fact that the market is expecting stocks to be an inflationary
So, barring something drastically changing if bond yields are able
to decisively crack the overhead resistance levels, the odds would
favor not a bear market in stocks but more likely an extension of the
bull market in stocks but also perhaps a dramatic increase in its rate
Have you thought about where to invest as bond yields rise? Find
out with a Free Trial to my service. Click here .
BlueLinx Holdings is Making Rebar Sexy
As Bob Dylan once said: “the times, they are a changing.” And nowhere
is this clearer than in the stock market over the last few weeks. Usually,
the equity space is a place where sexy sectors, such as technology
and biotech gather much of the momentum, the press and money flows.
But recently there has been a big shift in the MEL system, as I describe
above as the markets, the economy, and people’s lives have been dramatically
changed by the COVID pandemic. As a result, different sectors of the
market have benefitted from this evolving landscape.
A case in point are the shares of BlueLinx Holdings (BCX) a Georgia
based building materials distribution company which are starting to
move decidedly higher ahead of expected earnings on 3/11/21. BlueLinx,
which is far from being a household name, is in a business sweet spot
at the moment as it distributes anything from wood and wood products
to rebar and specialty products to builders, installers, contractors
and home improvement retailers through its network of fifty outlets.
Most recently, the company delivered record results in its Q3 2020
report delivered on 11/2020 combined with a positive outlook. Moreover,
the company cited rising materials prices, rising home improvement
and homebuilder product demand as ongoing and allowing them to have
some pricing power and improving margins. And given the supply and
demand situation in housing at the moment, it doesn’t look as if much
has changed. But perhaps the most important aspect of the company’s
fundamentals is its focus on improving the balance sheet debt reduction
and increasing their liquidity, two factors which are likely to make
their results even better, especially when it comes to free cash flow
The stock has been trending up steadily for several months, but the
recent pullback due to recent market events has provided an entry point.
Moreover, On Balance Volume (OBV) and Accumulation Distribution (ADI)
remain attractive. There is good support at the 20-day moving average
I own BXC as of this writing.
Market Breadth Delivers Upside Reversal
The New York Stock Exchange Advance Decline line (NYAD) recovered
last week, making a new high and once again giving an all clear to
the uptrend in the stock market.
Remember, as long as NYAD continues to make
new highs, remains above its 50 and 200 day moving averages and its
corresponding RSI reading remains above 50, the trend is up. This
set of observations has been extremely reliable since 2016.
For its part, the S & P 500 (SPX) also delivered a new high,
confirming NYAD while On Balance Volume (OBV) delivering a reassuring
new high and Accumulation Distribution (ADI) showing a decent improvement.
The Nasdaq 100 index (NDX), after a short-term
reversal also made a new high last week. Moreover, as with SPX, the
OBV made a new high and ADI also turned up showing the rally has
Bonds Hold the Key to Stocks
The relationship between stocks and bonds has changed and that change
brings a new clarity to the market equation. I am not suggesting that
this relationship can’t and won’t change again nor that stocks will
What I’m suggesting is that if the current trends and relationships
remain as they are, stocks could rise for a lot longer than anyone
expects because there is so much money that can come out of bonds and
into stocks. Thus, from a trading standpoint, it’s more about finding
what’s most likely to go up than whether the long-term trend in stocks
is up or down.
For more on how to deal with the current market checkout my latest
Your Daily Five video here .
For more details on bonds, currencies, and stocks check out my recent
interview with Wall Street Reporter.com here .
Joe Duarte is a former money manager, an active trader and a widely
recognized independent stock market analyst since 1987. He is author
of eight investment books, including the best sellingTrading
Options for Dummies, rated a TOP
Options Book for 2018 by Benzinga.com - now in its third edition, The
Everything Investing in your 20s and 30s and six other trading
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