Either the market bounces here or it goes into correction. It is currently in a pullback.

First, let’s look at what is putting pressure on the stock market today. Simple, interest rates surged and some interest rate technicals broke down because of it. I don’t think we can avoid a full blown correction if the 10-year hits 2%.

I want to point out first that the SP500 and most large cap indexes are still holding above trend. Actually the SP500 is at its trend line and if it goes they all go. It needs to bounce. But interest rates said otherwise today.

Simply put, you can not have the risk-free Treasury yield higher than the high-risk earnings yield of the SP500 for very long. The only short-term problem is rising interest rates mean falling bond prices until they stabilize at a higher rate.

How high they should go and how high they will be allowed to go by our over-active central banks are two different things. The 10-year Treasury should be yielding 6-8% with today’s inflation rate historically, period. See the problem?

What may be more familiar to many are mortgage rates. If the 10-year was at 7% then mortgage rates are always 1.5% higher at 8.5%… which was the norm awhile back. The problem of course is to maintain current entry mortgage payments on a new 30-year loan, house prices have to drop 40% at an 8.5% mortgage… and that deflates the new housing bubble and makes homes affordable again (price wise) for the young generation …yeah!

Here’s the TSP S fund chart…

Small caps are breaking two support lines (trend, and lows) but they are not the market leaders. Another 8% down would be easy from here. Then the fun begins.

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Categories: Perspectives