Yields Spikes And Stocks Get Crushed!

The stock market finally got spooked by an ongoing sell-off in bonds. As bond prices fall, their yields go up, a signal of rising interest rates. Low interest rates have been an underpinning of the current bull market in stocks, now in its ninth year.

On Friday, the rate on the 10-year Treasury note jumped to a four-year high. The Dow and S&P 500 each lost around 4 percent, their worst week since January 2016. On Friday, the Dow dropped 665 points, or 2.5 percent. Some earnings-related selling in big names such as Apple and Exxon Mobil added to the swoon.

The yield on the 10-year Treasury climbed to 2.84 percent Friday from 2.79 percent late Thursday and from 2.41 percent at the start of the year. It’s at its highest level since 2014.

The Fed could raise interest rates more quickly than investors are prepared for if inflation accelerates at too fast a pace. That could further upset markets, which have seen an unusual lack of volatility for more than a year.

After Friday’s jobs report, some economists raised their forecast for Fed rate increases this year to four from three.

While sentiment is changing, both global economic growth and corporate earnings remain strong.

We are at the halfway mark in the Q4 reporting season for the S&P 500 index, with results from 251 index members already out and another 92 on deck to release results this week.
Only retail and other consumer oriented operators still to report results.

Total earnings for the 251 S&P 500 members that have reported results already are up +16% from the same period last year on +10.5% higher revenues, with 80.5% beating EPS estimates and 78.1% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 64.9%.

What we are witnessing with estimates for the current and following quarters is extremely positive.

Not only is growth tracking above what we had seen from the same group of 251 index members, but a record proportion are beating EPS and revenue estimates.
Total Q4 earnings are expected to be up +13% from the same period last year on +7.7% higher revenues. This would follow +6.7% earnings growth in 2017 Q3 on +5.9% growth in revenues.

Strong economy is translating into not only stronger profits for companies but also better sales, something that investors have been expecting.
Roughly 79 percent of all companies have reported stronger revenue for the quarter than analysts expected.

Technically, the SP 500 remains above the 50 day line and bonds appear oversold for the time being.

Typically, wide range days occur as a result of panic buying or selling…which generally doesn’t deep to be a strong indication of continued directional momentum.
The long bond is showing grossly oversold RSI levels – which don’t generally occur unless price level is substantially below fair value in the short term.

Volatility levels are spiking…something fairly typical during minor corrective moves.

VIX level never rose above 20 on Friday – which shows that volatility levels are remaining above the threshold for global fear.

Under normal circumstances, we would see VIX rise above 20 during 600 point corrective move on the Dow, something that didn’t happen on Friday and tells me that SP 500 options traders are not as fearful of the current corrective pressure as the retail trader who’s trading blue chip stocks.

All in all, there’s a chance the broader market can descend to the 50 day line, but with volatility levels fairly stable, rates still near historic lows and both earnings and economic growth increasing in stability, the odds of seeing strong market meltdown is not probable at this time.

Expect congestion or reversal back to the upside over the next few weeks.

Roger Scott
Senior Publisher