Market Update: Yield Curve Breakout Bullish For Stocks

S&P 500 Futures: (2-3 Days)  Bullish

The markets recaptured early weakness again on Thursday. And market momentum has begun to strengthen on the heels of the yield curve breakout.  Rising yields should be supportive to financial stocks near-term. Movement up above 2370 on the S&P 500 (INDEXSP:.INX) should help drive a rally back to 2401 and above.  I’m looking to buy weakness if given the chance Friday (today).

TECHNICAL THOUGHTS 

Thursday review:  Equities tried their best to pull back Thursday but yet again, rallied all the way to positive by the close, with the S&P 500 closing over the highs of the last two days, while the NASDAQ 100 made the highest close of the week. Market breadth remained mildly negative with slightly more volume going into Declining vs Advancing issues, and Crude oil managed to pare its losses on the day. Gold accelerated down to 1200, having fallen for four straight sessions and seven out of the last Nine.

Overall, with only 30% of the S&P 500 stocks trading above their 10-day moving average, one would think the market would be far lower than it is currently. The S&P 500 has failed to even breach prior week’s lows, and this entire selloff has largely occurred inside the range of last Wednesday’s big surge, back on March 1. It’s thought that the stock market indices have managed to absorb this correction attempt, and that higher prices are a good likelihood into next week’s FOMC meeting.

Treasury yields rallying has been the biggest story in recent days, which has happened not just in the US, but globally, as seen in huge bond selling in German Bunds, Swiss 10s nearly turning positive. The 2s/10s curve steepened meaningfully enough to break out of the downtrend that’s kept the yield curve in flattening mode for the last few months. This bodes well for further steepening heading into the FOMC.

Given that the Jobs data was well received, there may be further selling in the Treasury bonds market. This would help the Financials Sector (NYSEARCA:XLF) turn back up more swiftly.  For now, this a key factor as to why equities likely don’t experience any type of material weakness into FOMC.

Crude oil’s decline accelerated further Thursday following the quick selloff into Wednesday’s close.  The trend here is short-term bearish, despite Crude’s ability to lift a bit from earlier lows.  Commodities as a whole have suffered in recent days, led by Energy, Precious metals, and Softs like Sugar, Coffee, with the grains also beginning to look “toppy”  Overall, it’s thought that the Dollar rally could result in further selling in the space, as we’ve talked about in recent reports.  The gains in Dollar vs Yen in particular was quite important and positive, and the Yen decline looks ripe for additional downside volatility in the days ahead, and could move lower much quicker than Euro, or Pound Sterling vs USD.  Stay tuned.

XLF Financials Sector

The Financials complex has not yet participated on this latest rally in treasury yields, but has proven resilient and not shown any signs of real weakness in recent days that would suggest a pullback is upon us.  Given that Financials outperformed and held up above key support at 24.65 Thursday, they set up well for a bounce in the days ahead given the yield curve steepening.

Financials should perform well in this environment, which in turn should help provide a tailwind for stocks given their size within the SPX.

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