Using Last Week's Fed Focus for Clues on Market Behavior

Plus, a TNX level to keep an eye on

Senior Vice President of Research
Jan 18, 2022 at 8:54 AM
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The SPX closed below its November closing high but remains above a trendline connecting higher lows since late September/early October. This trendline extends from 4,625 on Monday to 4,645 at week’s end. Plus, the SPX held above its 50-day moving average at 4,675, while the 80-day moving average marked lows in November and December -- and sits just below the round 4,600 century mark at 4,582.”

            - Monday Morning Outlook, Jan. 10, 2022

The Fed was in focus again last week, with Goldman Sachs (GS) predicting four rate hikes in 2022 and balance sheet run-off to begin in July. In the news, New York Fed Chair Bill Dudley offered his opinion in an op-ed piece in Bloomberg that the Fed needs to become a lot more hawkish, and voting member St. Louis Fed President James Bullard said he believes four rate hikes would occur in 2022 in a Wall Street Journal interview. With rate hikes imminent to fight off inflation, yet an economic report on Friday indicating retail sales retreating in December, stocks pulled back in a choppy fashion.

The good news is multiple rate hikes are beginning to be factored in, with CME Group’s web site indicating that Fed funds futures traders are assigning a 61% chance of at least four rate hikes this year. Additionally, support levels that I identified last week held, with the S&P 500 Index (SPX – 4,662.85) closing the week above a trendline connecting higher lows since September and early October, after a Monday move below this trendline was supported by the index’s 80-day moving average.

MMO SPX 80day

Despite growing negative sentiment among equity option buyers (see chart below), the SPX comes into the week with the bulls still in control, even after a failure in the middle of last week to sustain a move above fourth-quarter 2021 resistance in the 4,700 area. If the SPX closes below the trendline connecting higher lows since September (4,650-4,665 in the shortened holiday week) and its 80-day moving average -- currently situated at the round 4,600 century mark –- bears may grow even bolder. With the SPX below its 2021 close already, the technical backdrop would become a significantly weaker argument for bulls.

mmo jan 17 chart 2

With the Federal Reserve’s hawkish tone very much in focus again last week, I thought the below charts of the CBOE 10-year Treasury Yield Index (TNX – 17.72) would be of interest from a technical perspective, and for those of you navigating the rotation in and out of different sectors.  

There have been two spikes in the TNX during the past five months, one began in August and lasted through mid-October, and the other began in early December. During this period, technology stocks, which are heavily represented in hedge fund portfolios and represent a huge weighting in many broad market indices, have lost momentum and leadership, in favor of energy, financial and consumer defensive names.

Moreover, coming into 2022, many forecasters advised moving out of technology stocks and into financials, with the thought that financials would benefit in a rising rate environment.

This takes me to a bigger picture look at the TNX. As yields climb amid the consensus opinion that higher interest rates are ahead, one level of interest for technicians, as explained by Rick Santelli on CNBC Friday afternoon, is the 1.76% level, or its 52-week high achieved in March 2021.

I have a slightly different view, but in either case, if these levels represent resistance, we may be closer to a top in the TNX, or at least a hesitation around current levels.

The TNX level that I am assigning importance is the 1.83% level, which, as you can see on the first chart below, is where the yield closed in January 2020 before reversing a multi-month uptrend when it gapped below a trendline that had connected higher lows in previous months. It was around that time that Covid-19 headlines were gaining momentum and bond market participants began smartly discounting lower yields. Exactly two years later, Covid-19 remains a threat to the world economy, even though many projected that it would not be a threat this year.

As you can see on the second chart, the 1.83% level is also in the vicinity of the TNX’s declining 1,000-day moving average, which may prove pivotal, marking peaks in the TNX in both 2010 and 2011. For you Fibonacci retracement followers, note that a 50% retracement of the TNX’s 2018 peak and its 2020 low is just above at 1.89%, implying 1.83% to 1.89% could be levels of interest as the Fed turns hawkish and other stimuli have been removed. 

mmo jan 17 chart 3

mmo jan 17 chart 5

“… large-cap technology stocks, as depicted by the Nasdaq-100 Index (NDX – 15,592.187), is not yet a broken trade for bulls from a technical perspective. The pullback last week simply pushed this index down to its December lows, which occurred prior to and after the December FOMC meeting… the NDX has been moving higher within a bullish channel connecting higher highs and higher lows for over a year (since September 2020)...A weekly close below the bottom rail of this channel would put the tech trade more at risk

                - Monday Morning Outlook, Jan. 10, 2022

With long-term rates still arguably in a downtrend and nearing potential resistance, Large Speculators -- per the weekly Commitment of Trader’s report -- are making their biggest bet for rising 10-year note since January 2020 when rates actually went into a free fall, and an underwhelming December retail sales report. I continue to think that those that feel tech is dead because of rising rates are premature.

Admittedly, technology bears may ultimately be proven correct. But since the Nasdaq-100 Index (NDX – 15,611.59) has not yet broken below support from the bottom rail of a bullish channel in place since September 2020, and the potential that all the buzz about higher rates could be reaching a climax, making a big bet against large-cap tech at this particular juncture is a risk from a technical perspective. And it could possibly be a premature bet if significantly higher interest rates and interest rate expectations from this point moving forward is not in the cards.

There are a couple of concerns, implying a bullish stance doesn’t come with its own risks. Notably, last week was the second test of the bottom rail of its channel in five trading days, whereas the time between such tests was a month or longer prior to last week. And like option buyers on SPX component stocks, there is a growing pessimism among NDX component option buyers (second chart below), which is a headwind that will become stronger if a technical breakdown below occurs on this index.

But just as the 50-day and 80-day moving averages on the SPX have tended to mark troughs on SPX lower rail channel breaks, the NDX’s 200-day moving average situated at the round 15,000 millennium mark could be supportive in the event of channel breakdown on the NDX. And for what it is worth, 14,915 is the level that coincides with the NDX’s November closing high and is thus another “line in the sand” for bulls. But be careful with using such lines in the sand if rates break out above potential resistance levels that I discussed.

mmo jan 17 chaart 5

mmo jan 17 chart 6

 

Todd Salamone is Schaeffer's Senior V.P. of Research

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