A huge shift is underway in the market, and Wall Street's on the wrong side: Technician

There's a tectonic change unfolding below the market's feet, and investors better get their portfolios in order, according to Chris Verrone, head of technical analysis at Strategas Research Partners.

"Bond yields are going to go up, and you want to own banks and cyclical stocks when that happens," Verrone wrote Wednesday. This is "hands down the most important thing going on right now."

Examining a chart of the 10-year US Treasury yield, Verrone finds that the key rate appeared to find support just above 1.5 percent.

Going forward "we think bond yields can challenge 2 percent as we move into the first quarter of 2017," Verrone said Wednesday on CNBC's "Trading Nation."

On Thursday, the 10-year yield reached further above 1.7 percent, and is now closing in on a four-month high.

Interestingly, Verrone observes that "the Street is very long 10-year notes right here, so the Street's on the wrong side of this."

Turning to stocks, the technical analyst notes that "the equity market is also beginning to tell us that rates can go higher from here." Specifically, he notes that bank and cyclical names have started to lead the way, while the more defensive and more rate-sensitive utilities and telecom stocks "have all deteriorated over the last several weeks."

"This is a message that yields want to go up," he added.

This all makes the case for avoiding stocks with high dividend payouts, since these names will perform badly as higher bond returns make their yields look less attractive on a relative basis. Instead, Verrone would recommend investing more heavily in banks, which profit as the differential between short-term and long-term rates rises.

Interestingly, Evercore ISI technical analyst Rich Ross similarly sees the 10-year yield rising to 2 percent.

"Yields have been in a downtrend," but that downtrend "culminates in a false breakdown to a new low" at about 1.35 percent, Ross said Wednesday on CNBC's "Trading Nation."

He says the chart will rise to its 100-day moving average, which sits just below 2 percent.

"That false breakdown to an all-time low that we saw back in July is going to provide the springboard for a test of that critical moving average," Ross said.

There's also a fundamental case for rates to rise. Boris Schlossberg, a macro strategist at BK Asset Management, says the labor market continues to show strength, which means it could be "all systems go for a rate hike" in December.

"Once we see that rate hike, yields are definitely going to start moving in the right direction, so I agree completely that this is a turn in yields and it's not going away," Schlossberg said Wednesday on CNBC's "Trading Nation."

Of course, we'll get the latest news about the labor market Friday, when the U.S. Bureau of Labor Statistics releases its latest employment report.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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