Relative Performance and the 10yr Yield
The surge in the 10-yr Treasury Yield is the talk of the town this week. Last week it was the breakout in the Russell 2000 ETF (IWM). Is there a correlation here? Today’s commentary will look at the relationship between the 10-yr Treasury Yield and three relative performance charts: IWM relative to SPY, KRE (banks) relative to SPY and QQQJ relative to SPY. Ratio charts measure relative performance – and nothing else. The ratio rises (relative strength) when the numerator (IWM) increases more than the denominator (SPY). Conversely, the ratio falls (relative weakness) when the denominator increases more than the numerator.
The chart below shows the IWM:SPY ratio (black line) and the 10-yr Treasury Yield (red line). Notice that these two lines move in the same direction, for the most part. Both rose from September to March, which means IWM outperformed SPY when the 10-yr Treasury Yield rose (large green area). The lines fell from April to July, which means IWM underperformed SPY when the 10-yr Treasury Yield fell (red shading). Most recently, the lines have been rising as IWM outperforms and the 10-yr Treasury Yield rises. Who knew lines could be so fascinating!
The current evidence is bullish for small-caps as the Russell 2000 ETF (IWM) broke out of a big range last week and is starting to outperform SPY. The rise in the 10-yr Treasury Yield also creates a bullish tailwind for relative performance. Ratios and the 10-yr Treasury Yield are interesting, but keep your eye on the actual price chart for trading decisions.
There are also some interesting dynamics at work with the KRE:SPY ratio, Regional Bank ETF relative to SPY. In fact, the same dynamic is at work. Notice out KRE outperformed SPY from October to mid March and from August to November (green shading). The 10-yr Treasury Yield also rose during these timeframes. KRE underperformed SPY from mid March to mid July as the 10-yr Treasury Yield fell (red shading). There is clearly a positive correlation between the KRE:SPY ratio and the 10-yr Treasury Yield.
Ignore the 10yr Yield when Analyzing QQQJ
And what about the QQQJ:SPY ratio and the 10-yr Treasury Yield? The Nasdaq 100 Next Gen ETF (QQQJ) represents the top 101 to 200 stocks in the Nasdaq. QQQ is the top 100 and QQQJ is the next 100. These stocks are smaller than those in QQQ and tend to have higher growth rates (it is known). PE is not a great metric for growth, but we can see a higher risk profile in QQQJ by comparing its PE to QQQ. QQQ has a PE of 30.43 and a forward PE of 26.68, while QQQJ has a PE of 46.35 and a forward PE of 32.42. Valuation is clearly more stretched for QQQJ (Source: invesco.com).
Wednesday’s sharp decline in high-flying stocks was blamed on the surge in the 10-yr Treasury Yield. While that may be true for one day, the chart evidence is mixed.
The next chart shows the QQQJ:SPY ratio (black line) and the 10-yr Treasury Yield (red line). QQQJ outperformed as the 10-yr Treasury Yield surged from mid November to mid February (green shading). The ratio then plunged as the 10-yr Treasury Yield hovered above 1.5% (blue shading). Most recently, the QQQJ:SPY ratio worked its way lower as the 10-yr Treasury Yield worked its way higher (September-November).
Now, about these ratio charts. I hardly ever use ratio charts because they tell us nothing about absolute performance or the trend of the underlying ETF. Ratio charts simply capture relative performance. Also note that relationships and correlations can change and there are other factors at work. This is why we are usually better off focusing on the actual price chart. The chart below shows QQQJ in a clear uptrend since the June breakout. The uptrend may be choppy, but the ETF recorded 52-week highs in September and October.
Market Regime Notes
The Composite Breadth Model (CBM) remains bullish and has been bullish since May 2020 (see Market Regime page for charts covering the CBM, yield spreads and Fed balance sheet).
There was a bullish breadth pop with the SPY breakout on October 14th and a bullish Zweig Breadth Thrust on October 25th.
Large-caps (SPY), large-cap techs (QQQ), mid-caps (MDY) and small-caps (IJR/IWM) hit new highs in November as bull market participation expanded the last six weeks.
Investment grade and junk grade corporate bond spreads remain at low levels overall (since July) and there are no signs of stress in the credit markets.
The Fed balance sheet numbers were not reported because of Veterans Day. Last week the balance sheet expanded by $18.7 billion and hit a new high.
10-yr Treasury Yield Surges off 200-day
The bond market remains confused with the 20+ Yr Treasury Bond ETF (TLT) falling sharply this week, the 10-yr Treasury Yield surging off its rising 200-day and the 10-yr Breakeven breaking out in October. First, the 10-yr Breakeven “represents a measure of expected inflation derived from 10-Year Treasury Bond and 10-Year Treasury Inflation-Indexed Bond (Source fred.stlouis.org). All talk was of the “surprise” in CPI, but the 10yr Breakeven broke out in early October and this breakout argues for higher inflation.
Traditionally, bonds loathe inflation because it reduces the real return and increases the chances of tighter monetary policy via rate hikes. There is no doubt that inflation reduces the real return, but today’s Fed is not the Fed of the 1980s. Anyone old enough to remember Paul Volcker? I do. In any case, rising inflationary pressures are generally bearish for bonds and bullish for yields. The chart below shows the 10-yr Treasury Yield holding the rising 200-day SMA this week and surging back above 1.55%. The bond market was closed for Veterans day and will be open on Friday. The 10-yr Treasury Yield remains in an uptrend as long as 1.4% holds.
Note that the 7-10 Yr Treasury Bond ETF (IEF) corresponds to the 10-yr Treasury Yield. The 20+ Yr Treasury Bond ETF (TLT) is the most widely followed/traded Treasury bond ETF and the chart is a right mess. Short-term, the ETF reversed in the 50-67% retracement zone with a move back above the falling 200-day SMA over the last six weeks. A small bull flag formed and TLT broke out with a surge last Friday. The hard throwback returned to the flag breakout zone for the first test. The blue lines show a larger triangle taking shape. A break below the 200-day and lower line would be bearish for TLT and this could signal the start of a sharp move higher in the 10-yr Treasury Yield.
Gold Breaks Out with Big Move
The Gold SPDR (GLD) broke above its summer highs with a big move the last six days. In fact, this is the biggest six-day advance since July 2020. Overall, the range narrowed for GLD over the last six months and the ETF broke resistance to turn bullish. The breakout zone turns first support to watch on a throwback. Those not interested in chasing (like me) can wait for the Momentum Composite to dip to -3 or lower for a short-term oversold condition.
The next chart shows GLD with the StochClose indicators on the price chart, StochClose and the Trend Composite. The 5-day SMA is at 171.77 (blue) and the StochClose line is at 171.79 (green). StochClose (lower window) will cross above 60 when/if the 5-day SMA crosses 171.79. I show the 5-day SMA for price because StochClose is smoothed with a 5-day SMA. The lower window shows the Trend Composite turning positive.
Dollar Extends on Wedge Breakout
The Dollar Bullish ETF (UUP) seems to like something out there because it surged the last two days. The bigger trend was already up (green rising channel). Short-term, UUP pulled back with a small wedge and broke out on October 29th. This breakout ended the small pullback and signaled a resumption of the existing uptrend. The late October low marks support at 25
Oil Pulls back within Uptrend
West Texas Intermediate ($WTIC) remains in a long-term uptrend. After a 34% advance from mid August to mid October, oil fell back the last few weeks with a short correction. WTI became short-term oversold on 4-November (red arrow) and bounced, but did not exceed the prior highs and trigger a short-term breakout. The DB Energy ETF (DBE) chart in the lower window shows a bull flag taking shape. This is a short-term downtrend within a long-term uptrend. A move above Tuesday’s high would break flag resistance and signal a continuation higher.