Thursday, June 10th, 2021
1/ Large-cap stocks hit resistance
2/ The recent swing lower on TNX means something
3/ Schwab shares break upward trendline
4/ The bottom line
1/ Large-Cap Stocks Hit Resistance
The Nasdaq 100 (NDX) rose nearly 1% in back-and-forth trading today. The price action broke out of the narrow ranges it had been in earlier this week.
This is particularly interesting considering that at the yesterday’s close, the three large-cap indexes had shown resistance, while small-cap stocks showed support. The chart below shows how State Street’s Dow Jones Industrial ETF (DIA), its S&P 500 ETF (SPY), and Invesco’s Nasdaq 100 ETF (QQQ) all bounced lower as sellers took over. This resistance showed up near former highs.
Comparing that price action with the iShares’ Russell 2000 Index ETF (IWM) makes experienced chart watchers wonder which will give first. Will large-caps rebound and make new highs? Or will small-caps breakthrough previous lows? There is at least one scenario to suggest that stocks will break higher even as inflationary pressures resume. It comes from the next chart which displays how interest rates have behaved over the past week.
2/ The Recent Swing Lower on TNX Means Something
The U.S. Treasury Note Index (TNX) broke through previous lows and trended lower recently. This is an interesting development for markets because investors have consistently shown that, despite the Federal Reserve’s insistence that inflationary influences will be temporary, they expect more inflation to come anyway.
The price action on TNX suggests that money will become easier to borrow if this trend continues, not harder. Consequently, a greater increase of money in circulation would follow. A falling TNX actually helps inflation, as opposed to stemming it. Those who accept the authoritative voice of the Fed should expect to see these rates move higher at some point, but for now, market participants are sending a message that the Fed might have overlooked something.
3/ Schwab Shares Break Upward Trendline
The Chart Advisor newsletter has previously featured Charles Schwab (SCHW) as a company stock that is well correlated with expectations for rising interest rates. If investors think TNX is going higher, they expect SCHW to go higher because the company’s business model is set to benefit from rising interest rates.
The chart below shows that SCHW has begun to break down through a sloping trend upward. That’s important to identify because this first sign of weakness on SCHW coincides with falling interest rates. If investors thought this was a temporary move, they would be buying up a dip to the trend line of SCHW.
4/ The Bottom Line
Major indexes hit some resistance today and IWM closed lower. TNX falling could benefit SCHW as interest rates continue to climb.
Originally posted on 10th June, 2021
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