alice

NFTRH; Energy and Interest Rates

Last week we noted XLE’s attempt to break above the SMA 50. In NFTRH 457 we noted its unsurprising failure. Today I want to look closer, starting with the daily chart of XLE.

Last week’s attempt failed and today we have a new attempt at the downtrend channel line as XLE breaks above the SMA 50 (oil is bouncing as well). To me, that is notable in and of itself.

xle

But what makes it more interesting is what Treasury bond yields are doing. First, let me take this opportunity to let you know I’ve addressed the scaling issues on some of the charts in which 2 different price charts are compared. For instance, on the nominal 2 and 10yr yield chart the correct interest rates were noted on the chart but due to the way it is scaled, the 2yr yield appeared higher than the 10yr, which is obviously not the case. So voila, something I should have done long ago; the 2 prices are separated by upper and lower chart panels as opposed to appearing in the same panel. I’ll do this with any other problematic and/or confusing charts going forward.

yields

In light of the still bearish 10yr bond sentiment and CoT data we reviewed over the weekend, I think this break upward (in the opposite direction of the bond itself) is something to be respected today.

tnx

Why might yields be jumping when everyone knows thinks they know the Fed is going to stand down tomorrow? Because the US dollar is under fierce attack and one of the functions of interest rates is to address and compensate for a weak currency. Just saying…

Anyway, I am not saying that long-term yields are going to definitively reverse back upward, but the work we have done has laid the groundwork for just that. As you can see, Energy is usually right up there in positive correlation to interest rates so this is a significant factor in viewing the chart above.

yields vs. stock sectors

I am going to back off on some of the anti-yield stuff by taking a modest profit on XLU while still holding Biotech at this time. GS, a pro-interest rate item, is still held. I am considering taking a shot at Energy as well. But I don’t make recommendations for other people, I just try to make sense of how I am managing so that I can present a sensible picture to NFTRH readers.

On the big picture, virtually no one is expecting a sea change in the yield continuum, but I for one am not so sure about that. The 30s, 10s and 5s can be interpreted as perching below their respective limiters (EMAs 100, 110 & 130 respectively).

yields

It is FOMC week, a time when the Fed has a chance to jawbone the market. Yellen sounded like a dove a couple of weeks ago and with the track record these people have, I would not put it past her to get a memo to the contrary and talk tougher, especially in light of the US dollar’s decline. Alternatively, the Fed may be playing stealth politics with the Trump admin, which I think wants a weak dollar to aid its fiscal policy, as it played politics with the Obama admin, flooding the system with liquidity through monetary policy every time the market hiccuped.

So the caveat is that I don’t inherently trust chart moves (like the break upward in yields) that happen immediately prior to FOMC’s statement release. But as of now, it is what it is; a bullish short-term move in yields.