Are We Seeing a Turning Point in Interest Rates?

October 10, 2023  |  Michael Reilly

The fear on Wall Street has hit a feverish pitch.

Sentiment surveys have reached levels of bearishness not seen since October 2022.

Concerns of higher interest rates are driving option buyers to continue to bet in favor of a market selloff.

Let’s take a look at the technicals…

All that fear can be seen in the CBOE Put/Call Ratio.

When investors are fearful, as they currently are, put buying increases as investors seek to either bet against a market recovery or to insure portfolios against further losses.

Extremes matter.

More often than not they signal a turning point in the market.

The last time put buying hit these extreme levels was late December 2022. And in typical fashion, just as investors put buying peeked, the market reversed, leading to a historic rise that remained in place into this summer.

Will this time be different?

That’s not a bet I’d make.

If you look at it from a contrarian standpoint, we can’t deny that these readings can be considered bullish.

All this bearishness and selling pressure is based on fear – fear that interest rates will continue higher – and if not higher, at least at the currently relatively high levels for longer.

But fear is anything but logical.

We know that ultimately the Fed will be forced to pivot and not only end the cycle of increasing rates but reverse and begin the process of lowering rates to stave off a recession of their making.

Investors have witnessed the metamorphic rise in yields as the Fed has aggressively been working to squash rising inflation.

But moves like that in bond yields are not only unusual (historic), they are unsustainable in the long term.

The behavior of the 10-year Treasury yield (TNX) is something investors should pay attention to.

Yields on the TNX have been trading well above its normal trading range.

Since August 2022, TNX has moved above the upper Bollinger Band corresponding to its 200-day moving average.

What’s important for you to know is that moves outside the confines of these bands often precede meaningful reversals in the opposite direction.

So, it’s unlikely yields on the TNX will remain outside (above) the redline.

Meaning we shouldn’t be surprised by a pullback.

That doesn’t mean it will happen in the next hour, day, or even week.

It means investors should have a plan for how to take advantage of a falling rate environment.

Here’s a hint: Your plan might benefit from looking at the homebuilders’ ETFs or individual stocks that are part of the industry.

Here are a few ideas you can check out:

ETFs including ITB (iShares Home Construction ETF) or XHB (SPDR HomeBuilders ETF).

Individual stocks including D.R. Horton (DHI), Lennar Corp (LEN), and Toll Brothers (TOL).

Until next time…

If you’d like to talk more about how Avalon can help you position yourself to be ready for the changing markets, you can schedule an appointment today with one of our experienced advisors who will guide you through our various adaptive investment models.





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