Stocks are suffering another bout of volatility on Thursday, with the Dow Jones Industrial Average falling to test the lows seen on Tuesday as bond yields keep drifting higher.
Technicals and market history suggest an oversold bounce should be forthcoming. But it’s just not happening. Raising fears of a 1987-style meltdown.
Will it happen? Probably not. Financial conditions remain easy. The pullback has been modest to date. The economy looks strong. And policymakers are sure to step in should the situation worsen.
But it cannot be fully dismissed. Keep an eye on these five charts as stocks endure the drama.
Charts to Watch as Stocks Fall: Dow Jones Industrial Average (INDU)
Just a few weeks ago, the Dow Jones looked set to rise toward the 27,000 threshold as the powerful post-election uptrend pushed on. The index has since fallen nearly 9% and it is currently consolidating below its 50-day moving average. As a downside target, watch for a drop to the 200-day moving average, which hasn’t been tested since the summer of 2016.
For an upside target, a rally back to the 20-day moving average should be expected to see if the bulls have what it takes to resume the uptrend, or if they are on the verge of succumbing to a more prolonged pullback.
Charts to Watch as Stocks Fall: CBOE Volatility Index (VIX)
The VIX, known as Wall Street’s “fear gauge,” suffered its largest-ever one-day gain on Monday — 115% — which was enough to cause the Credit Suisse AG – VelocityShares Daily Inverse VIX Short Term ETN (NASDAQ:XIV) to blow up and burn an untold number of investors.
The problem was the sudden rise in the VIX after years of calm. The chart above shows just how out of proportion Monday’s surge was (and Tuesday’s intra-day rise) compared to recent history. For stocks to rebound, these measures need to calm back down with a move back into the teens.
Charts to Watch as Stocks Fall: iShares 20+ Year Treasury Bond (TLT)
The proximate cause for the selloff was Friday’s stronger-than-expected jobs report. But the real catalyst was the resulting rise in long-term interest rates — and weakness in long-term Treasury bond prices, as shown by the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) above — as investors pushed up inflation expectations. This lifted the 10-year yield above 2.8% and towards 3%.
Although interest rates were at this level in late 2013 and early 2014, and the economy is much stronger now, investors are worried ongoing fixed-income losses will result in forced selling and perpetuate the move to the downside in stocks. A reprieve in the TLT selloff will give investors time to calm down.
Charts to Watch as Stocks Fall: U.S. Dollar Bullish Index Fund (UUP)
Heading into the selloff, a lot of attention was paid to the wipeout in the U.S. dollar, which in turn weighed on Treasury bonds by making U.S. assets in general less attractive to foreign investors.
But amid the selloff, the dollar has found its footing. Helped by pushback against some anti-dollar comments from President Trump’s Treasury Department by trading partners in Asia and Europe. An ongoing rebound here could further help the Treasury market stabilize and pull rates down a little.
Charts to Watch as Stocks Fall: Financial Select SPDR Fund (XLF)
Looking at the Financial Select Sector SPDR Fund (NYSEARCA:XLF), which gives easy exposure to the financials sector, it’s important to remember that higher long-term interest rates aren’t without their silver lining. Most importantly, it will help boost bank earnings by lifting net interest margins. The gap between deposit rates and lending rates that feeds into earnings.
Once investors leave panic mode (assuming they do), I would watch for a bounce in the XLF as a first indication folks are looking through the negative of higher rates to consider some of the potential upsides.