There Is Another Threat Looming Ahead Of The Stock Market Despite Passing Chart Key Test

While the S&P 500 has found support around a key technical level, avoiding a negative signal for now, it is the interest rates that will be the driving force behind the index in the near term.

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Stock prices have been able to advance due to the downward trend of the closely watched 10-year Treasury yield below the psychological 4% level. There was a period last week when the yield exceeded that level. A momentum indicator, the 200-day moving average, was also at risk of breaking below the S&P 500.

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The stock market was buoyed by the decline in yields at the end of last week, and they were higher again on Monday. S&P 500 was trading comfortably above the key 4,000 level in late morning trading, at about 4,070, with the 200-day moving average at around 3,940. A price breakdown below the 200-day moving average could be viewed as a negative sign if it breaks below the average of the last 200 closing prices.

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Some strategists believe the S&P 500's behavior around the moving average could determine whether the October lows will be the bottom for stocks. In October, the S&P hit a low of 3,491.58.

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If the S&P 500 holds above the 200-day for a period of a month during a bear market, Jonathan Krinsky of BTIG said it has not made new lows since 1950. Even though the index briefly dipped below that level last week, it has risen back above it now.

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In order for the index to indicate real negative momentum, chart analysts say it needs to close below that level and hold there for at least six months.

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But Krinsky said it is still possible for the S&P 500 to break its lows in the near future. As far as the upside is concerned, I still think it is relatively limited. “A high volume area of 4,125 to 4,150 is another one that I would expect to cap the upside,” he added.

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Moreover, Krinsky noted that the ultimate driver may be interest rates, which are in the spotlight this week as Fed Chairman Jerome Powell testifies on Tuesday and Wednesday before Congressional committees about the economy and the state of the economy.

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Stocks in general struggle with rising yields, but especially tech and growth stocks with higher multiples because of their future earnings prospects. There is a possibility that those earnings may become less valuable in the future due to rising interest rates and higher costs of money.

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“Equity markets have been led by yields. Every single tactical top in equities in the last 18 months has been preceded by a tactical bottom in yields during the same period," Krinsky stated. “In my opinion, the move higher in yields doesn't look like it's over yet, even though the bounce Thursday and Friday definitely helped the equity market. Having just rallied with yields from 3.33 at the beginning of February to 4.08 in a fairly short period of time, we shouldn't be surprised if there is some consolidation and pullback in the future."

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The yield moves in the opposite direction of the price. This is the first time that the 10-year yield has risen above 4% since November last year. As of Monday morning, the yield was at 3.94%.