The 30-Year Treasury Note was the “Grinch who stole Christmas” last year. And, it looks like it’s set up for a repeat performance this year.
Let me explain…
December is usually a strong month for the stock market. All the financial television talking heads have told us so over the past week or two.
But, “usually” does not mean “always.” And, all an investor has to do is look back at the action last year to understand that fun fact. The S&P 500 dropped 2.7% last December.
The weakness back then was blamed on rising long-term interest rates. The yield on the 30-year T-Note rallied from 4.35% to 4.8% in December.
This happened despite the Federal Reserve Board actually cutting short-term interest rates by 25 basis points during the month.
Rising long-term interest rates are a headwind for the broad stock market. And, it looks like the winds are set to blow against the stock market this December as well.
Look at this chart of the 30-year T-Note yield (TYX)…
The action over the past three months has formed an inverse head-and-shoulders pattern on the chart. This is a bullish pattern that often indicates the reversal of a bearish trend and the start of a bullish one.
The “neckline” of the pattern is at 47.50 (the equivalent of 4.75%). The “head” is the October low near 45.50 (4.55%). So, the pattern is 2 points high.
If the yield closes above the neckline, then the pattern will likely play out with a 2-point rally on this chart. That gives us a target of 49.50 – or 4.95%.
That move is on par with what long-term interest rates did last year, despite the Fed lowering short-term rates. And, that move produced a headwind for the stock market – making it difficult for stocks to rally.
Most investors expect the Fed to lower short-term interest rates following the FOMC meeting next week. Most of the financial TV talking heads expect lower rates to help stocks rally into the end of the year.
It looks to me like longer-term rates have a different idea.
Keep an eye on the 30-year yield. A move above 4.75% will likely invite the Grinch back to Wall Street.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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