Last week, increasing bond yields had the market worried. Come Monday, the 20+ year treasury bond ETF (TLT) gapped higher and ended the day up 1.12%. This fared especially well for growth stocks as the Nasdaq 100 (QQQ) tests resistance from the 50-day moving average.
But what was the underlying factor that increased bond yields? This is where inflation comes in.
Last week, the chairman of the Federal reserve, Jerome Powell, gave new 2021 inflation estimates that increased from 1.8% to 2.4%. This worried bond investors, because if inflation goes up, it will decrease the value of the dollar. That means bond yields will need to increase to offset the decrease from the value of the dollar.
Hence, good old supply and demand come into play as bond auctions are forced to sell bonds for lower prices to meet the waning demand. Cheaper bonds force the yields up, which means investors along with the market will not be too happy.
An easy way to tell if investors are worried about increasing yields is by watching not only the TLTs, but also the high-yield bond ETF (JNK). Because high yield bonds are riskier to own, they are a good representation of investors risk appetite in the stock market.
In conclusion, if JNK goes up, watch the 50-DMA to clear, as this shows investors’ confidence is improving. However, if JNK and TLT begin to break down, stay cautious and watch for their recent lows to hold as support.
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ETF Summary
- S&P 500 (SPY): Right under the 10-DMA at 392.75. 385.64 next support the 50-DMA
- Russell 2000 (IWM): 219.92 next support area from 50-DMA
- Dow (DIA): Watching to hold over 325 level
- Nasdaq (QQQ): Needs to clear resistance 321.11 50-DMA
- KRE (Regional Banks): 64-66 next support area
- SMH (Semiconductors): Needs second close over 50-DMA at 238.11
- IYT (Transportation): 245.46 support from recent low
- IBB (Biotechnology): 160.73 resistance
- XRT (Retail): Needs to hold 88.54
Mish Schneider
MarketGauge.com
Director of Trading Research and Education
Forrest Crist-Ruiz
MarketGauge.com
Assistant Director of Trading Research and Education