Q3 Earnings Alert! Plan early for this week’s stock reports with all key data in 1 placeSee list

Surging Rates Tank Stocks: Time to Watch Spreads Now

Published 09/22/2023, 03:47 AM
US500
-
US2000
-
US10YT=X
-
US30YT=X
-
BKX
-
HYG
-
TLT
-
VIX
-
SMH
-
HGX
-
CDX
-

Stocks were hammered as rates increased following hotter-than-expected initial jobless claims and the Fed’s less-than-impressive performance on September 20. The 10-year rate rose seven bps to 4.48%, while the 30-year yield rose 11 bps to 4.56%. The 2/10s curve rose by 11 bps to -66 bps. Rates reached new cycle highs.US 30-Year Bond Yield-Daily Chart

The problem, as I see it, is that despite rates on the Treasury curve rising rather dramatically, high-yield rates haven’t risen. Spreads between high-yield debt and Treasuries have contracted this whole time, and that appears to be ready to change.

Once it does, it will be bad news for stocks because essentially, stocks have traded with the easing of these spreads and for the most financial conditions since May because, again, stocks saw 200 bps rate cuts coming, which, of course, was just a fantasy.

High Yield Junk Bonds Break Lower

For that, the easiest thing to watch may happen to be the HYG. The HYG is the Junk Bond ETF, and the more it falls, the more it indicates high yield rates rising.

It seems pretty clear that the HYG has dropped below the symmetrical triangle today, which could be a big deal. I have noted previously in my unusual options activity service that the HYG had recently seen bearish betting.HYG-Daily Chart

Spreads Could Start Rising

The move in high-yield junk rates resulted in the CDX High Yield spread index (NYSE:CDX) moving up and, more importantly, breaking a pretty big downtrend. If that downtrend is broken and spreads start rising from here, it will bring serious pain to markets because as this rises, the VIX rises, and the stock market’s earnings yield rises.

At least on the surface for today, it would appear that spreads broke a downtrend, which could mean that high yields are heading higher, and more importantly, serious pain for markets is yet to come.

CDX Index Chart

S&P 500 Eyes 4200

Meanwhile, the S&P 500 closed right on support at 4,330, and a gap lower tomorrow would signal a break of the neckline of the Head and Shoulder pattern and probably a much bigger decline to come, probably back to that 4200 level I have focused on for some time. I guess it is worth pointing out that the JPM Collar put is at 4,210, and that could offer some support, which is only about 2.6% lower from here.S&P 500-Daily Chart

Russell 2000 Set for Further Declines

The Russell 2000 has already broken its neckline, and there is not much stopping it at this point from revisiting its lows around 1,700. Russell 2000-Daily Chart

20+ Year ETF Poised for a Bounce

Meanwhile, the TLT closed at a new 52-week low and surpassed its October low of $91.90. Rates probably aren’t finished going higher from here, but this will have to bounce at some point, too; it has been falling for weeks already.TLT-Daily Chart

Banks Teetering on Support

The Nasdaq bank ETF (BKX) is sitting on support at $79.50, and it would not be a good thing if that support level breaks because it probably means the Russell goes even lower, and it probably means the ETF drops to around $74.KBW Index-Daily Chart

Housing Sector Looks Weak too

Meanwhile, the HGX Housing index finished the day lower by 2.7%, gapped below the support level at 522, and the next level of support comes at 505. The housing index is clearly not looking great, and this is something to watch because this can be a leading indicator for the rest of the market.HGX Housing Index-Daily Chart

Semiconductors Weaken

Finally, the Semiconductor ETF SMH broke below its neckline today, closing the gap at $140.50. Again not a great look for the sector or the market.SMH-Daily Chart

Don’t forget that the BOJ meeting could have a big impact on rates globally and the yen.

Original Post

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.