foxex: Stocks Steady as Bond Yields Fall

Chart Advisor | INVESTOPEDIA

Focus on the Price

By John Jagerson, CFA, CMT

Wednesday, January 02, 2019

1. Global economic slowdown?

2. S&P 500 fighting Fibonacci resistance

3. Treasury yield curve continues to flatten

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Major Moves

U.S. traders faced early global economic headwinds as the markets opened in 2019.

South Korea kicked things off by announcing its exports fell in December for only the third time since late-2016. A 13.9% drop in exports to China was the primary culprit, showing the Chinese economy is slowing down and is causing ripple effects throughout Asia and the rest of the global economy.

Italy then jumped into the action announcing the European Central Bank (ECB) had put Banca Carige, widely considered to be Italy's last big problem bank, in administration. This move has stoked fears among some bond traders that a European banking crisis may be looming over the horizon, although I believe those concerns are extremely premature.

Not to be outdone, the United States announced that the December Manufacturing PMI dropped to its lowest point since September 2017. At 53.8, the index still shows growth in the manufacturing sector (any number above 50 indicates growth), but the rate of growth is slowing.

In spite of the signs of a potential global economic slowdown, stock traders remained resilient while bond traders continued their move into Treasuries.

The S&P 500 rose by a mere 0.13%, closing at 2,510.03. The Nasdaq, on the other hand, climbed 0.46%, closing at 6,665.9.

The yield on the 10-year Treasury (TNX) dropped 0.93% to 2.66%, while the yield on the 30-year Treasury (TYX) dropped to 2.98%, closing below 3% for the first time since August 27, 2018.

S&P 500

The S&P 500 was able to bounce back from some pre-market selling today, but the index is still fighting some Fibonacci resistance.

The S&P 500's most recent bearish move started when the index broke through support at ~2,630. The index had been bouncing up off this level for nearly two months while it consolidated after pulling back from its all-time highs in September.

Once this level gave way, the S&P 500 dropped to a recent low of 2,346.58. During the past week, however, the index has retraced 61.8% of the decline.

By erasing 61.8% of the previous bearish move, the S&P 500 has reached a significant Fibonacci retracement level and has matched the magnitude of the rebound the index experienced after dropping in October.

So far, the S&P 500 has attempted to break above the 61.8% retracement level at ~2,523 two times in the past three day, but it has been unsuccessful.

If the index fails to break above this level within the next week, the S&P 500 could pull back and start to consolidate once again. This time, the consolidation range between support at ~2,346 and resistance at ~2,523 would be much lower than the consolidation range that formed from mid-October to mid-December.

Read more:

Fibonacci Numbers/Lines

Top 4 Fibonacci Retracement Mistakes to Avoid
Strategies for Trading Fibonacci Retracements

Source: finviz.com

Risk Indicators

While U.S. stock indexes were able to fend off early-day bearishness, Treasury yields weren't so lucky. The 10-year Treasury yield (TNX) dropped nearly a full percent as traders continued to move into Treasuries.

Treasury prices and Treasury yields have an inverse correlation. When prices go up, yields go down. Conversely, when prices go down, yields go up.

Watching Treasury yields drop like they have since early-November tells us more and more traders are buying Treasuries, and they don't care that the price of Treasuries is going up.

This is a sign that traders are moving from a "risk on" position – a scenario where traders are willing to take on more risk in return for the potential of a greater return – to a "risk off" position – a scenario where traders are more concerned with protecting their capital than generating additional returns.

Oftentimes, movement in the bond market precedes movement in the stock market so seeing Treasury yields continue to collapse in the face of market uncertainty is a strong signal that stocks are on a short leash and will require extremely bullish earnings and economic news to stage a comeback.

The Impact of an Inverted Yield Curve

Yield Curve Risk

Bottom line: Not a Strong Start for the Bulls

The bulls on Wall Street were able to hold their own in the stock market today, but the bears are still in control in the bond market. This doesn't bode well for the stock market bulls.

While it is far from a foregone conclusion, most of Wall Street seems to be bracing itself for a rough and volatile start to 2019. The upcoming earnings season certainly has an opportunity to give stocks a lift, but if corporate America can't meet expectations, earnings season could be an anchor around the stock market's neck.