This year has been a battle between two key markets – Growth versus Value as US interest rates fluctuate widely. When US interest rates (TNX) rise, this has led to relative outperformance from Dow Jones Industrials (INDU) and many value sectors (i.e., Financials, Healthcare, Industrials, Energy, etc.). However, when rates fall, Nasdaq Composite Index (COMPQ) and growth sectors (i.e., Technology, Consumer Discretionary, Communication Services, etc.) tend to outperform.
The battle for market leadership between these two markets continues, and there may be another leadership change developing over the near term.
The relative leadership changes between INDU and COMPQ are visible on the charts over the past year. For instance, a lower high in TNX during late-March 2021 (1.765%) and again during May 2021(1.70%) signal a correction in yields. As rates fell, INDU and S&P Growth ETF (IVE) relatively underperformed COMP and S&P Growth ETF (IVW) in the past 3-months.
However, TNX appears to have found pivotal support at 1.128-1.129% (7/20/21 and 8/4/21), corresponding to the 50% retracement (1.134%) from the 8/6/20 to 3/30/21 rally. There is additional crucial support at 0.986-1.001%, coinciding with the 1/6/21 gap-up breakout (0.986%), the 61.8% retracement (0.986%), and the 1/27/21 reaction low (1.001%). However, TNX may not need to retest this support if TNX convincingly breakout above resistance along 1.371-1.394% (38.2% retracement from 3/30/21 to 7/20/21 decline and the 50-day ma).
Favorable jobs numbers released last Friday morning led to the Dow Jones Industrials soaring 144.26 and the Nasdaq Composite Index declining 59.36. Although one day’s action does not make a trend, higher yields may trigger the next rotation to INDU and value stocks.
The market action over the next few days to weeks can confirm yields are reversing direction. Since the Dow and S&P Value (IVE) have been range-bound since the May timeframe, rising yields may lead to technical breakouts as investors return to the value trade. Technology and growth stocks consolidate once again as Financials, Healthcare, Industrials, and Energy resume their leadership roles into late-summer to early-Fall.
It is hard to know when to rotate from one area of the marketplace to another. However, if yields have bottomed and begin to move higher, this may confirm the next rotation.
Attached is a 1-year correlation study of the Dow 30 stocks against TNX. As rates rise, Dow Jones stocks with the highest degree of correlation to TNX may outperform peers, at least near-to-medium term.
For example, the top 10 correlations in INDU to rising rates are CAT (0.97 correlation), DOW (0.94), JPM (0.94), WBA (0.94), TRV (0.92), CVX (0.91). GS (0.90), BA (0.87), MMM (0.87), and DIS (0.85).