The S&P 500 broke its 8 month uptrend yesterday, as US 10 year Government bond yields have continued to move higher, signalling potentially more pain ahead for the S&P 500 stock index.
For the calendar year the S&P 500 is still up after falling in January and February this year, as the S&P 500 has not looked back since touching the lows for the year around the 1820 level. However the index has closed below its long term uptrend where it's current resting on a support level. (See chart below)
Moving forward the key to the direction of the S&P 500 is whether the break in trend is confirmed and it closes on a daily chart within or below the rectangle box shown in the chart below.
Break In Trend - Head Fake
An important note to make is that earlier this year on June 27th the index broke its uptrend after the Brexit vote shocked the international markets. However it quickly rallied back within the uptrend as coordinated efforts by the Central Banks, to artificially lift the stock markets with more stimulus worked. This allowed the index to move significantly higher over the next few months. Therefore it can't be ruled out that the break in trend is only a head fake by the markets and the Central Banks once again panic and step in to save the markets.
If the break of the uptrend is confirmed and is able to close below 2128 level on a daily basis the next level of support is around 2035 / 45 level.
Catalyst For The Break In Trend
Since making the highs in August this year the S&P 500 has been going sideways to slightly sloping down. One of the main catalysts for this is the rise in US 10 year Government bond yields, which have been steadily rising since making lows in July this year. (See chart below)
The chart below of the US 10 year Government bond yields is of a weekly chart, which allows you to see a better indication of the bigger longer term trend that is taking place.
From the chart you will notice that the weekly downtrend broke in the first week of September, where I have circled the chart. After it closed above its downtrend it fell briefly to the 1.59% level, which is now its new support level. After resting on support it started climbing again in the first week of October.
The fact that weekly downtrend that has been in place since 2015 broke last month, indicates a big shift is taking place for the S&P 500 index as well as global stocks in general.
Why Higher Rates Are Not Good For Stocks?
Stocks traditionally move in opposite direction to bond rates / yields, as stock indexes are priced / valued according bond yields. If bond yields move higher stock dividend yields need to move higher as well, to compete with higher returns from bonds. To get higher dividend yields stocks need to either, generate higher dividends or the price of stocks falls or both.
The other reason higher bond yields are not good for stocks is that the higher the yields go the more expensive it is to take on debt for consumers and companies.
Higher debt payments for consumers reduces demand for products and services effecting companies revenues and profits, which ultimately ends with stocks falling.
Since corporations in the US have record debt levels to fund massive buybacks and dividend payments. Rates climbing and breaking its downtrend is also bad news for stocks.
To see a recent article where I discuss the shifts in bond yields and the negative impact on global stocks you can click Is the bull market in stocks ending?
Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.
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I am a private trader and equities investor that loves the trading and investing world, following the markets and everything in between.