Barron’s Michael Kahn makes the case that the line in the sand for equities is the 10 Year Bond’s Yield is at 5%; Breaking out over that — a move that appears imminent by the next 2 Fed meetings — sets up a possible market break in stocks — not the denouement — but a definite sharp sell off.
"With the intermediate-term trend rising and resistance from the
long-term trendline still well above the current market, it means that
there is little on charts to get in the rally’s way.>
Let’s go to the chart:
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Break out in the yield of the 10 year (daily)
Chart courtesy of Barron’s Online
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"The charting textbooks tell us that a rising trend that pushes through resistance levels is likely to continue rising. Whatever negative pressures by interest-rate bears (or positive pressures by bond bulls) at 4.682 have been overcome.
So, where can interest rates go, now that resistance has been broken? For that, we turn to long-term charts and see that the trendline from the peak in interest rates in 1994, when the 10-year was over 8%, is now coming into view from above. What that means is that the rate for the 10-year can rise to 5% over the next few weeks without officially ending the major bear market in yields."
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Once again, to the chart:
Longer Term Chart: 10 Year Treasury Bond Yield
Chart courtesy of Barron’s Online
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Watch that line at 5% — a breakout over that is where things get dicey:
"If we assume that the relationship between stocks and interest rates has returned to what it used to be — rising rates being bad for stocks — then this does not bode well for the stock market in mid-2006.
A weaker economy in the near future is certainly something that will also pressure the stock market today, as the stock market reacts to what it sees coming, not to what is happening now. In other words, if a recession is coming, then the stock market will weaken before the economy does.
All told, the bond market is now giving off ominous signals for the stock market, but not the end-of-the-world indications the staunchest of the bears might think. If the long-term interest rate trend is broken and rates rise significantly above 5%, then we’ll need a major rethink. But we’ll cross that bridge when we get to it."
This is very consistent with our prior warnings as to why inflation is so bad for equities . . .
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Source:
Rising Bond Yields Will Pressure Stocks
MICHAEL KAHN
Barron’s Wednesday, March 8, 2006
http://online.barrons.com/article/SB114183316614392601.html
I’d say it is a matter of when not if. Markets never get to their final destination without a few detours but………
I don’t know how the market can muster anything but continual reflex rallies with lower highs here. Do you? And alot of valuation models are starting to change their tone very significantly as rates rise from the 2003 low. I quick and dirty valuation model I use is starting to show us well overvalued and closing in on the 2000/1987 valuations. We are finally at a lose/lose situation for equities. If the long term rates go down, they will only become severely inverted with the Fed jamming rates up. If long rates go up, they kill cyclical stocks and commodities which are what has really held this market in tact. The rules have changed IMO and the only way out is a reset.
See http://investorsdiary.blogs.com/my_weblog/2006/03/tnote_yield_fin.html
Doesn’t this steepen the yield curve and help the
economy?
I understand high interest rates will drive away
investors from the market but won’t it give
the Fed an incentive to hike since the yield
curve won’t invert?