Don't Ignore This Chart!

Correlation: Banks And Treasury Yields

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As we await the Fed's interest rate decision this week, it's a good time to review a key area of the market that is heavily swayed by the direction of interest rates - banks ($DJUSBK).  As the 10 year treasury yield ($TNX) rises and the yield curve steepens, the net interest margin (key profit driver) for banks grows.  The chart below illustrates that there's a fairly tight positive correlation between the direction of the TNX and the direction of the DJUSBK.  Recently, the TNX came under some pressure and that took a toll on bank stock prices.  Over the past few weeks, however, there's been a resurgence in treasury yields to the upside with the 2.20%-2.25% area providing a serious short-term obstacle.  If the treasury market begins to believe that the Fed is serious about hiking rates, I'd look for a break this week above 2.25% and banks to perform extremely well on a relative basis vs. the S&P 500.  Should the Fed hesitate and hold rates steady at this week's meeting, it could be viewed as a sign of economic weakness and a harbinger of more downside ahead for equities in general and banks more specifically.  Check out the correlation over the past five years:

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist at EarningsBeats.com, where he provides stock market education, guidance, and trading strategies using a unique combination of technical, fundamental, and historical analysis. Tom provides EarningsBeats.com members with four portfolios (Model, Aggressive, Income, and Value), all designed to beat the benchmark S&P 500, and a revolving Watch List of hundreds of companies reporting strong quarterly earnings (must beat both revenue and EPS estimates) and exhibiting technical strength as well. These companies comprise EarningsBeats' annotated Strong Earnings ChartList (SECL), from which Tom trades exclusively. Tom writes a Daily Market Report (DMR) for members to include an executive summary, market outlook, sector/industry watch, and trading ideas. Learn More
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