Market Timing Bonus Chart of the Week: Why Interest Rates Matter

Market Timing Bonus Chart of the Week: The “Old Normal” Continues

UPDATE for 6-29-2013: Rates are headed in the right direction.  See the private trading notes from the end of the week on the free subscription page (sign up at the link below).  More also in this Sunday’s issue by email.  (For now, it might be best to ignore the long red line on the chart for Friday below.  I am betting that is an error on the system, but I’ll verify it with Worden Brothers.  It does show up on the Yahoo charts as well, so we’ll see.  I’ve seen these blips corrected many times, except during the “Flash Crash” a couple of years ago.  That one was real.)


10 Year Treasury below 2.50% is a good beginning for a rally in bonds, which will help stocks.

UPDATE for 6-26-2013 @ 9:47 am: A fall of rates back below 2.50% you see on the chart below could potentially energize a further fall in rates back below 2.4%, which would potentially allow the stock market to re-top or at least make a significant lower high at least.  Continually falling rates would be helpful to the metals as well and but may, on a relative basis at least, hurt the regional banks that have been rallying and indeed breaking out today (KRE) based on higher rates.


Below 2.50% the 10 Year Treasury could rally back below 2.41%, which would be a big positive for stocks.

UPDATE for 6-12-2013 @ 12:03 pm: There are some interesting cross-currents in the market today.  Rates are rising due to the fact that the Fed is indicating it will back off of its mortgage buying spree soon.

On the other hand, as stocks sell off, money is likely being shifted to Treasuries, so rates are experiencing a push down.  The net today is rates did NOT stay above the prior high of 2.211%.  That is why the housing stocks are doing better than the market today after a steep sell-off beginning on 5-22-2013.

Over time after the SP500 Index finds its bottom, rates will likely slowly rise up to the 2.4% target at least.  Above there, stock prices may be pressured even more and housing may reach a new recent low.

The 10 Year Treasury chart was in a steady up trend in yield, which swooned a bit on Thursday and then recovered as stocks may have completed a mild correction (see the prior Brief on the list to the right).

Now what? Stocks can tolerate sideways rates, but most often, we’re not that lucky. So rates are likely to inch up a bit more from here, unless the Fed is working behind the scenes to cap this move. We can’t know that for sure, so we have to follow the charts to see it. We will know what the Fed is doing or not doing by watching the 10 Year Treasury chart.

Market Timing Treasuries (TNX, TLT, TBT)
06-07-2013 Close

It used to be that when rates went up too much or too fast, stocks went down. Why? Because bonds are supposed to compete for investors money vs. stocks when rates rise and become more attractive than stocks, which are considered riskier. Debt is always paid before shareholders are paid in the “Old Normal.”

Why then did the stock market and yields rise on Friday? I believe the market knows that the current rates are artificially low and are not needed when the economy is recovering on it’s own. So somewhat higher rates are being welcomed by the stock market as a sign of recovery. Rates are still very low as far as the stock market is concerned. Some say it could tolerate 10 Year rates of 5%, but my opinion is that the market would dive if that happened too quickly.

So what will stocks do if rates creep up a bit more? My guess is that the stock market would not mind an increase in rates up to about 2.4% which is a prior area of overhead resistance. I cannot be sure of that, so we’ll have to follow the reaction of stocks should rates move above 2.211%, the most recent daily high.

It could be that stocks correct once again if rates move above that 2.211% or it could happen above 2.41%. After all, that is the “New Old Normal,” my twist on PIMCO’s name for the twisted Fed induced investing environment, which they called the “New Normal.” I’m changing my name this week. Let’s make it simple and call it the “Old Normal”!

The markets will act surprised at a certain rate level, because they’ve gotten too complacent with the “New Normal.” “You mean I have to pay reasonable rates to borrow money now? Shucks!” This means the tendency of these investors will be to “shoot the market” and ask questions later.

But at what interest rate on the 10 Year Treasury will they “shoot the stock market”? I’ve given you two possible numbers. Follow these key numbers from this post and watch how stocks react as we reach and then breach them and you’ll be well ahead of most investors in market timing rates.

There is more on the 34 other markets in this week’s free newsletter (subscribe using the subscription box slightly down and to the right).

Be sure to check out the GLD Market Timing Chart this week GLD ETF Chart.   Gold failed 2011 and 2012 support and lost its entire bounce only to begin a SECOND bounce from the prior low, which is now weakening even more since the end of the week.   Review the chart on the GLDTracker™ page.   And one more thing.   If you appreciate the chart, would you please take a moment and “Like” this page below?    Thanks very much.

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