foxex: Bonds Rising

Chart Advisor | Focus on the Price

Wednesday, September 02, 2020 Headlines

1. U.S. Dollar and bond prices move strongly higher
2. Showing signs of a top
3. Small cap stocks ready to surge

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Market Moves

Bond prices, as tracked by iShares 20-year Treasury index ETF (TLT), closed .95% higher as the U.S. Dollar index (DXY) also rose amid stock-market profit taking. However, cash coming out of stocks did not find its way to the commodity markets which saw gold and silver prices drop.

The chart below highlights that what bonds have done yesterday and today may be the beginning of an intermediate length trend. The panel at the top half shows the Fed Funds rate (FEDFUNDS) and the 10-year U.S Treasury Note interest rate (TNX). Both are near historic lows, and yet the 20-year fund has yet to hit a new high. If stocks continue to sell off in the weeks ahead, that could change.

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Showing Signs of a Top

Though stock indexes trended higher today, two stocks showed particularly heavy selling: Apple (AAPL) and Tesla (TSLA). The chart below shows that the euphoria from the share splits may be over and that profit takers have jumped in strongly to take profit from recent gains. This begs the question of whether these influential stocks may be signaling a top in big tech stocks, or stocks in general. The fact that these stocks fell while shares of Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOGL) closed higher, suggests that buyer enthusiasm has not waned. That implies that AAPL and TSLA shares will likely be a good buy after they retrace a bit.

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Small Cap Stocks Ready to Surge

Another reason stock indexes are not likely making a top just yet can be found in the chart below which compares Invesco's Nasdaq 100 index ETF (QQQ), State Street's S&P 500 index ETF (SPY) and iShares Russell 2000 index ETF (IWM). The right panel shows that small cap stocks are making a breakout from a flag pattern, while the other two closed at all-time highs. This extremely strong move seems to be predicting stability and confidence for the economy in the months ahead.

The Bottom Line

Bond prices and the dollar both moved higher, but so did stocks, suggesting the money came from the commodity markets. Apple and Tesla sold off, but that is likely only a function of profit-taking from post-split euphoria. Small cap stocks appear ready to surge higher, suggesting investors feel confident about the economy.