When the S&P 500 (SPX) rallied from the August 5th low of 5186, the yield on the 10-Year T-Note had just reached a low yield of 3.669%. By the end of August, the S&P 500 had risen to 5662 a gain of 9.1%. Yields were still declining as they did not reach their low of 3.603% until September 16th.
This is one of many instances I have observed over the years where interest rates and the stock market do not always move as many expect. Often stock investors expect higher yields to mean lower stock prices and for stocks to move higher, yields need to be declining. That is why I recommend analyzing them separately before you come to any conclusions.
The low yield in the 10-year T-Note came one week after the lower-than-expected CPI report triggered a bullish reversal in the S&P 500 on September 11th. The S&P gained 2.6% for the day and 4% for the week. The “weekly S&P 500 Advance/Decline Line made a new high” as I concluded that the market internals had signaled an upside breakout.
The higher yields in the first half of September along with the warnings about the poor seasonal trends to stay out of stocks. Despite the warnings of stock market weakness in September the S&P 500 gained 2.1%. More importantly, the major advance/decline lines, including the S&P 500, NYSE All A/D, and NYSE Stocks Only A/D line all closed the month at new all-time highs.
For many years I have used the MACD and MACD-His to determine the direction of yields in the US T-Note and bond markets. At the September low in the yields, both the MACD lines as well as the MACD-His formed bullish divergences (line c). Then both turned positive one day after the lows and moved further into positive territory.
By October 8th the yield on the 10-Year T-Note had risen to 4.033%. That was above the former support and new resistance at line a. The S&P 500 was also in a solid uptrend as it had risen to 5748.
Both yields and the stock market continued higher for the next month as yields moved to new post-election highs after the election, reaching 4.505% last Friday which was just short of the monthly R1 pivot resistance at 4.517%.
The MACD-His peaked in early October and has since formed lower highs or a bearish divergence (line b) as momentum has weakened while yields continued to move higher. The MACD lines crossed and the MACD-His turned negative on November 8th. The yields have bounced from the recent lows but the MACDs have stayed negative.
A close in yields below the 20-day EMA at 4.323% is likely to shift the evidence in favor of a top that could mean a decline in yields to the support in the 4.100-4.200% area, line a.
The 10-year Treasury yield has become an important reflection of investor sentiment as it is used to reflect the direction of mortgage rates and corporate borrowing costs. A rising yield often indicates expectations of stronger economic growth while a falling yield suggests uncertainty or potential economic slowdown.
To correctly determine the trend in interest rates one needs to look at the yield of other maturities such as the 2-year T-Note and the 30-year T-Bond yield. I have observed that the most reliable trend changes in yields when all three yields are trending higher or lower.
The 2-year T-Note yield generally follows the Fed Funds rate and therefore is quite sensitive to changes in the policy of the Federal Reserve. The yield peaked in late April 2024 at 5.054% even though the FOMC continued to leave rates unchanged. Yields did start to decline more sharply in June-July spiking to a low of 3.66% in reaction to more data that inflation was declining. This was consistent with the downtrending MACDs.
As yields stabilized in September the MACD and MACD-His both formed higher lows or bullish divergences (line c) before both turned positive. From the low of 3.512%, the yield rose to 4.387% on November 13th. The MACD-His peaked in October and diverged from prices (line b) until it dropped below zero and turned negative on November 19th. A close in the 2-year T-Note yield below 4.174% would be consistent with a top.
The 30-year T-bond yield shows a similar decline in yields from the April high of 4.486% to the September low of 3.906%. The downtrend in yields, line a, was broken in early October. The MACD-His peaked on October 10th and started to decline line c. The two distinctive lower highs are often seen before a top.
The MACD did not peak until October 28th and then turned negative on November 4th. It made lower highs as yields made new highs at 4.666% and 4.677% last week. The 20-day EMA is at 4.534% and a close below will increase the downside momentum.
A lower weekly close in the 2, 10, and 30-year yields will be further evidence of a top in yields. Sharply lower yields in the next two weeks will help start new downtrends in yields.
That could be in advance of a cut in rates at the December 17-18th Fed meeting. Lower yields should take some of the pressure off the stock market and encourage more investors to buy stocks.