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 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 risker 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.
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
The author may have a position in the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.