In our weekend piece this past weekend, we highlighted that although we expect long-term rates to head higher over time, we also think that they are ripe for a pull-back over the short-term. We showed how the chart on the TLT Treasury note ETF (which measures price) had become very oversold….and thus the yield on the U.S. 10yr note had become very oversold. Therefore, we said, we expect yields to pull-back over the near-term.
We’d also like to highlight that the yield curve has become quite extended as well. The U.S. 2-year/10-year yield spread has also become very overbought. In fact, its weekly RSI chart is the most extended it has been since the end of the credit crisis twelve years ago!!! That’s right, the weekly RSI chart on the 2yr/10yr spread moved above 85 last week…before closing just above 83 at week’s end. This makes is VERY vulnerable for a short-term pull-back based on its technical condition.
Don’t get us wrong, the intermediate and long-term technical conditions point to a further steepening of the yield curve. It has broken WELL ABOVE it’s trend-line going all the way back to 2013…and it is has made a significant “higher-high” above its late 2016 highs. Thus, this bodes well for further steepening over time. HOWEVER, it has reached the kind of extreme level on a short-term basis that should have it at least take a “breather” over the near-term…and will likely lead the yield curve to roll back over a little bit for a while.
We also highlighted in our weekend piece that the bank stocks were getting overbought on a short-term basis…and that the oversold condition of the bond market (overbought on yield) would likely lead to a pull-back in the banks stocks as well. Needless to say, any reversal in the shape of the yield curve could/should be negative for the bank stocks on a near-term basis as well.
Like it is with the yield curve, we believe that the bank stocks will regain their upside momentum over the intermediate and long-term…given that their charts are quite similar. Like the 2yr/10yr spread, the KBE bank ETF has broken well above its multi-year trend-line…AND made a key “higher-high”…so we do NOT think that the strong rally we’ve seen in the banks over the past year (and especially since September) has come to an end. We’re merely saying that it is due for a pull-back.
With all of this in mind, traders should be thinking about taking some chips off the table in the bank stocks…and look to re-enter the group in a more aggressive way in the weeks ahead. This does not mean they should dump the group completely…not by a long shot. However, they should consider lightening up on the group at these levels…with the thought of getting aggressive once again at lower levels later this spring……..As for longer-term investors, they should be less aggressive on the long side up here…and should instead be looking to add to their holdings after the upcoming pull-back takes place.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.