As we move closer to this week’s KC Fed Symposium in Jackson Hole, the yield on the U.S 10-year note has crept a bit higher…and it is now back above 1.3%. This is not a major development. In fact, the yield still stands below its August highs (which means it’s still below its highest yield from July, June, May, April, and March as well).
However, that yield did make a nice “double-bottom” low just below 1.2% this summer. Since then, it has made a “high-high”…and with this week’s action, it looks to have followed that with a “higher-low.” Therefore, if it breaks above the August highs of 1.36%, it will follow up all of these moves with another nice “higher-high.”……In other words, we’re starting to see a set-up on the technical side of things that could give us a signal that we’ve seen the lows on the 10yr yield for its most recent decline.
Of course, there could be some new developments in the coming days and weeks that would reverse this recent rise in long-term interest rates. We could see an even bigger pickup in Covid cases which would lead to more restrictions…which, in turn, would slow down the economy in a significant way. Also, the Fed might suddenly tell us that that they’re not going to taper back on bond purchases any time soon. (Needless to say, those two potential developments would likely be related to one another.)…..On top these possible developments, we could get some surprising news that is not on anybody’s radar right now.
Whether any change in direction of long-term interest rates has an important impact on the broad stock market or not is still up to debate. However, a change in trend for long-term rates should definitely have an impact on “group rotation” if (repeat, IF) long-term rates do indeed continue to climb. Let’s face it, it has not been a coincidence that the financials outperformed the tech sector from early September of last year until March of this year (by a wide margin). A big reason why this took place was because the trend in long-term interest rates shifted from a downward sloping one to any upward trend in late August/early September of last year. It is also not coincidence that a reversal of this “group rotation” took place in March…when LT rates topped-out and began their recent five-month decline. Since March, the techs have outperformed the financials quiet nicely.
Needless to say, we can take it one step further and say that this change in “group/sector rotation” has not been just a financials/techs issue. It has been a “value/growth” issue as well. Therefore, if (again, IF) the yield on the 10yr note breaks back above 1.37%...and thus starts to signal another change in the multi-month trend for LT interest rates is taking place, it is almost certainly going to have a BIG impact on which groups perform the best over the last four months (the last 1/3) of the year. With this in mind, investors should keep a VERY close eye on the yield on the 10yr note as we move towards Labor Day and beyond. (First chart below.)
Moving to the stock market, Alphabet Inc (GOOGL) is a GREAT company with GREAT prospects. Alphabet has obviously been a great stock as well. The stock is up 60% YTD…it’s up 75% over the past 12 months…and up over 168% since the March 2020 lows! It is by far the best performing stock of the FAANG stocks over all of those time frames. In fact, it has only seen one correction since the pandemic lows of March 2020…when it fell almost 18% in September of last year. Other than that correction, the stock has only seen a three mild pullbacks of 5%-8% over the last 17 months. (5%-8% would probably seem like more than a “mild pullback” for many stocks, but it’s not much for a big-cap tech name.)
However, GOOGL has become VERY overbought on a short-term basis. This does not mean that the stock is going to fall out of bed any time soon, but we need to point out that the reading on its weekly RSI chart is the most overbought it has EVER been. (Its 84+ reading is even higher than in was in 2005 or 2007.) Also, it is trading at the biggest premium to its 200-week MA it has EVER traded. In fact, it’s 97% premium is MUCH higher than the previous record of 76% in 2014.
Again, these readings to not necessarily mean that GOOGL is going to roll-over in a significant way immediately, but it DOES tell us that GOOGL is unlikely to rally in a significant (further) way over the near-term…no matter how good its fundamental outlook might be right now…….In other words, we’re not saying that investors should start selling the stock (especially long-term investors). However, investors and traders alike should be careful about chasing the stock up at these levels. There’s a good chance that you’ll be able to buy it (or add to the position) at lower levels in the coming weeks. (Second chart below.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.