10-Year Yield May Be Setting Up a Rebound to 4%: Could It Spoil Santa Rally?


Stocks finished the day higher by around 1% yesterday, rebounding some from Wednesday’s sharp sell-off; this made it an inside day.

We have often seen inside days when the day following a big move is inside the previous day’s candle. In the July top, the stayed inside the engulfing candle of July 27 for three days before breaking lower. We also saw an inside day on December 7, which led to the continuation of the rally.

However, the actual setup looks fairly negative from the standpoint that we had this big sell-off on Wednesday, and all the index did was retrace 61.8% of the decline thus far. Additionally, there was a big move lower into the close on Wednesday, with a gap higher this morning; those types of gaps tend to get filled quickly. Of course, it doesn’t have to, but in my experience, it usually takes a day or two.

SPX Chart

Yesterday, we got the revisions, and it was really surprising to see such large revisions coming through and revised downward, while jobless claims were also still very low. Still, the rose today, not by much, but enough to catch my attention with big downward revisions to GDP. Overall, GDP at 4.9% is still strong but down from 5.2%.

More important is that the overall trend in the economic data over the past few weeks supports a pretty healthy 4Q real GDP growth rate, which supports higher rates from the back of the curve. So, a moving back above 4% seems possible over the near term.

Additionally, the yield curve is getting close to steepening again, as the shows signs of positive momentum and the potential to break above a downtrend. What is amazing is how closely the has been trading with the 10/2 spread, and if the 10/2 spreads breaks to the upside and start to rise, it would suggest a VIX moving higher.

US10Y-US02Y-Daily Chart

Nike (NYSE:) reported tonight and beat on earnings but missed on revenue. More importantly, the company is looking to cut costs over the next three years, as it sees softer revenue in the second half of the year. It sounds like Nike will let go of workers, and they will see a charge in the third quarter.

The stock hasn’t done very much; while it is up off the lows, it is still well below the highs seen in April. A move back to the lower end of the range can’t be ruled out, especially if the sales are forecast to come in lower than expected.

Nike-Daily Chart

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