Thursday, 17 May 2018

Stock Market: How Market Digests Rising Yield

In my earlier post Stock Market: Effect of Rising Bond Yield on Growth Stocks, i looked at the effect of rising yield has on growth stocks, or one group in the market, especially QQQ etf. This post, i'd like to look how rising yield affects the general market (which i use SPY etf to represent).

Yesterday (17th May), as TNX gets to a critical level. For now, this level is above 3%, shown as "G" in the daily chart below. And more importantly, the yield seems to break above the trend line at G, this seems like a critical level, technically. So the SPY mirrors TNX movement almost bps by bps. SPY is entirely driven by TNX yesterday.

TNX daily chart 2017 to 2018
(Click chart to enlarge)

When i say mirror image, i mean an inverse mirror: TNX goes up, SPY goes down, like a lake reflecting landscape. This mirroring started on 15th May. The following 5 mins charts illustrate this.

5 mins chart of TNX vs SPY
(Click chart to enlarge)

This is not the 1st time it happened (in fact, it's the 3rd time this year). I noticed this exact same thing occurred in the period from “D” to “F” (or from 16th April to 25th April). See 1st chart above.

The following 30 mins charts show the mirroring movements from “D” to “F” (or from 16th April to 25th April). There’s little correlation before 16th April on these charts.

30 mins chart of TNX vs SPY
(Click chart to enlarge)

Clearly the equity market isn’t free of the rising yield concern YET. It would probably will never free of its influence as yields are rising. It's the question of speed and critical levels.

BUT the market has greater tolerance for the effect of rising yield now (at "G") when it's compared to the time from “D” to “F”.

This rising yield (TNX) takes a toll on the equity market (SPY) that starts the Feb correction when TNX rises from 2.4% to 2.6% (from “A” to “B” in the daily chart above).

In the 2nd leg of the correction from “C” to “D”, TNX rises from 2.8% to 3.0%.

So the next leg of correction comes when TNX are at a higher level. Maybe 3.2% before equity market reacts negatively. I said 3.2% because the threshold of pain seems to be a quantum leap of 20 bps. Perhaps, now that the equity market has gotten used to the idea of rising yields, it'll have to rise more than 20 bps before it reacts.

From these last few leg of corrections, one can conclude that the market is able to withstand a higher threshold of rising yield pain before it's effecting the equity market.

Another effect of the rising yield, and not surprisingly rising USD is that while the large caps that represented by SPY are under-performing IWM, which made all time high yesterday (16th May). This is because for large multinationals, whose increasingly deriving majority of their revenues abroad, are negatively effected by rising USD, which make their goods and/or services more expensive and thus less competitive. More importantly, rising dollars lower their revenues because of exchange rate. IWM, which are smaller companies, and in general more domestically focus, are in fact benefited by rising dollars because it reduces their import costs.

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