Rising bond yields are just one negative chart sign for stocks as investors await Fed's Jackson Hole symposium

Published Mon, Aug 22 20223:02 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

The bond market is bracing for a hawkish Federal Reserve Friday, and that could be a headwind for the stock market. The benchmark 10-year Treasury yield has been on the rise, breaking above 3% Monday for the first time since July 21. It was at 3.03% in afternoon trading. The Fed holds its annual Jackson Hole symposium at the end of the week. Bond strategists say the Treasury market is positioning for a hawkish message on interest rates from Fed Chairman Jerome Powell when he speaks Friday morning. Strategists who follow charts say the Monday stock market sell-off also comes after some negative technical signals, like the failure of the S & P 500 to break above its 200-day moving average last week. But the creep in the 10-year note yield is one reason why stock prices crumbled Monday, and the tech-driven Nasdaq is taking the biggest hit. Tech and growth stocks tend to do poorly when interest rates rise, since they often command higher prices based on the prospect for future earnings, and the promise of future profits is worth more in a low rate world and less when rates are expanding. "It's directly coinciding with what started happening with Treasurys selling off, and that kicked this whole thing off," said Mark Newton, head of technical strategy at Fundstrat. "The dollar moving up and Treasury yields moving up are bearish for equities. We've seen this happening time and time again." Newton said the next target for the 10-year would be 3.08%, near the high yield from July. He also expects a retest later this year of the peak yield of about 3.50% from the June high. As yields were peaking in June, stocks were bottoming. Michael Schumacher, director of rates strategy at Wells Fargo, said yields could keep drifting higher ahead of the Fed's symposium. If Powell is hawkish, as expected, Schumacher said rates could keep rising. But he expects a more moderate tone from the chairman. "I'm not convinced he's going to pull out the talons and sound hawkish. I think the fear is he's going to be hawkish," says Schumacher. Ian Lyngen at BMO expects a hawkish Fed, but he does not see much more upside for the 10-year yield. He thinks the Fed will affect the shorter end of the yield curve. "While we maintain that the yield peaks are in for 10s and 30s, the 2-year sector is a different issue given the tight link to policy expectations and the ongoing uncertainty as to how high the Fed will ultimately need to hike," he noted. The 2-year note yield is more driven by Fed rate policy than the 10-year. But the 10-year yield is closely watched by stock investors and the public. Tech stocks have been periodically tethered to it, falling as it rose and rising as it fell. It is also the yield that influences mortgages and many other business and consumer loans. Chart strategists have been expecting a stock market pullback, in the timeframe of September and early October, which is typically a seasonally weak time for the market anyway. While some believe the highs may be in for the summer, Newton said he does not see the start of a bigger sell-off just yet. "Technically, I'm positive between now and yearend, but I just think it's going to be a choppy four to six weeks, and in that time, it's going to be down, but I don't think that happens right away," said Newton. He said his work shows a rough patch for stocks in mid-September to early October. "I'm betting on a rebound starting this week," he said. "If we have any sort of rally out of this into September, you short or sell that." He said the bigger sell-off could take the S & P 500 down 400 points. Other strategists see a more negative warning in the charts. "Towards the end of July, we told people to pare back on hedges because it looked like we were going to have some upside follow through, but now we're getting ready to get hedged again," said Katie Stockton, founder of Fairlead Strategies. She said there was a sell signal in the Nasdaq-100 index chart on Friday, and there could be one in the S & P 500 by the close Monday. "Short-term moving average-based indicators turned positive in June," she said. Now, "they reversed and point lower." As the Nasdaq-100 sent a negative warning, the VIX chart showed a positive move ahead, which is negative for the broader stock market. The VIX is the CBOE's Volatility Index, based on puts and calls in the S & P 500. "The VIX gapped up today after holding up near 20. With no resistance until 35, a greater increase in volatility appears likely," Stockton noted. "The major indices have initial support at their 50-day [moving averages], about 6-7% below current levels." Stockton said there should be initial support for the S & P 500 at 3,967, but she does not expect it to hold. "We're making the assumption that we're going to see a significant retracement of the relief rally. We're recommending reducing exposure for our client base," she said. The S & P rallied to just under its 200-day moving average last week, and then turned lower from that 4,325 level. The 200-day moving average is currently at 4,318. The 200-day is simply the average of the previous 200 closes. A move above it is considered a sign of positive momentum and further gains. Some strategists had been encouraged by the fact that 90% of the S & P 500 stocks were above their 50-day moving average going into last week. There was also a 50% retracement in the peak to trough move in the S & P, which suggests the June low was the bottom for this cycle. But Jonathan Krinsky, BTIG chief market technician, said the bullish sign did not mean the market would go straight up. "History says the June lows should be the lows of the cycle, but that doesn't preclude a big pullback. After you get that 50% retracement you do get a decent pullback, "he said. Krinsky said he was watching the 4,170 level on the S & P 500 Monday, and the fact it was broken suggests a deeper pullback is in store.