Trading Places with Tom Bowley

10 Year Treasury Breaks Down, Signals Potential Economic Weakness Ahead

Market Recap for Thursday, April 13, 2017

The big news on Thursday - at least technically - was the breakdown in the 10 year treasury yield ($TNX) to its lowest close since early November.  Most traders have been expecting continuing economic strength based on wisdom from the Federal Reserve.  However, price action is beginning to tell a different story as money moves into defensive areas, including treasuries.  The move to treasuries is definitely spooking banks, which failed to hold onto neckline support on Thursday's close as you can see below:


This shows banks breaking down along with the TNX - a problem for the bulls no doubt.

Weakness in banks was a problem for financials (XLF, -1.29%), although the worst performing group was energy (XLE, -1.83%), led lower by all six industry groups.  Coal ($DJUSCL) was particularly weak, falling 2.51% on the session losing both its 20 day and 50 day moving averages in the process.

Pre-Market Action

The 10 year treasury yield is flat this morning so I suppose no further weakness in the yield is better than the alternative.  But a much weaker-than-expected empire state manufacturing report was released this morning and that is not helping those looking for economic strength ahead.

M&T Bank Corp (MTB) reported solid results this morning - similar to many of the banks last week - so it will be interesting to see if the overall banks index performs better this week.

Dow Jones futures are higher by 46 points with 30 minutes left before the open of a fresh new trading week.

Current Outlook

I'll be honest.  It was discouraging to me to see the 10 year treasury yield ($TNX) lose yield support at 2.30%.  That's a signal that money is rotating into defensive treasuries and that typically occurs when traders believe economic weakness could be staring us in the face.  That, combined with the Fed turning a bit more cautious based on its latest minutes, has the Volatility Index ($VIX) on the rise.  The S&P 500 needs to hold onto 2300 support or we could see a much more significant decline.  Here's the breakdown on the TNX:

The 2.30% yield support had held for months.  Clearly, there are other levels where we could see a big turn, but the breakdown on Thursday took bank stocks down as well with the Dow Jones U.S. Banks Index ($DJUSBK) losing neckline support at 390.  Both the TNX and DJUSBK need to rebound for the S&P 500 to turn in any meaningful way to the upside - in my view.

Sector/Industry Watch

The Dow Jones U.S. Transportation Services Index ($DJUSTS) fell significantly last week and has now moved down to test price support as you can see below:

Failure to hold 238 closing support will likely lead to a quick drop down to test the September/October double top just above 225.

Monday Setups

Acco Brands Corp (ACCO) has been a truly great performer, rising from 5.47 in January 2016 to a recent high of 14.45.  On that recent high, however, we've seen slowing price momentum on its weekly chart that suggests it's a high risk entry currently.  It's worth watching in coming weeks, though, as a pullback to reset its MACD and perhaps test its 50 week SMA would provide a much better reward to risk entry.  Here's the chart:

Note the green arrows mark nice buying opportunities in the past at the rising 20 week EMA.  However, with a negative divergence now in place, I'd look for a 50 week SMA test and possibly a MACD centerline test (pink arrows) as a much better entry point based on current technicals.

Historical Tendencies

April tends to be equally strong on the S&P 500 in both halves of the month.  Here's the breakdown on April since 1950:

1st through 15th:  58.37% chance of an up day with an annualized return of +22.67%
16th through 30th:  52.87% chance of an up day with an annualized return of +13.51%

Key Earnings Reports

(actual vs. estimate):

MTB:  2.15 vs 1.94

(reports after the close, estimate provided):

CE:  1.71

NFLX:  .38

UAL:  .37

Key Economic Reports

April empire state manufacturing survey released at 8:30am EST:  5.2 (actual) vs. 15.0 (estimate)

April housing market index to be released at 10:00am EST:  70 (estimate)

Happy trading!

Tom

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