What About The Rising Rate Environment?

For the last few years we've heard almost daily how we are transitioning to a rising rate environment. The Federal Reserve is normalizing monetary policy and interest rates are on their way to the moon. Rather than getting sucked into this narrative I've chosen to focus on the price action. Price has suggested that interest rates will remain low for an extended period of time, we received further confirmation of "lower for longer" with this week's Jobs Report.

Following some jaw-boning from the Fed a few weeks ago most were convinced a June rate hike was a done deal. Many leading asset groups from the last several months were cast aside due to this inevitability of higher rates. High yielding groups like Utilities, Real Estate, and Consumer Staples were written off as overcrowded "safety plays", while precious metals have pulled back after a torrid run from the beginning of 2016. Traders moved away from these groups over the last several weeks as they have been caught up in the short-term banter of the financial media.

If we take a look at the longer-term charts the trends remain firmly intact and appear ready to rally once again.

PCG (Utility)

PCG broke out from dual resistance levels this past week. This formation (Rounded Bottom/Cup-Handle) is a bullish continuation structure and I see higher prices ahead.

IYR (Real Estate) Monthly

The long-term action for Real Estate remains very positive. Traders have gotten caught up in the short-term noise surrounding the Fed and are ignoring this 15-month bull-flag consolidation, which continues to trend higher following the downtrend break in March.

Many Strong names in the Consumer Staples Sector have been building solid consolidations and look ready to resume higher:

KO

PM

RAI

Silver pulls back to major support and rebounds

SLV

SLV Monthly

It should be noted that SLV is holding above its 20 Month SMA for the first time since late 2011. A long-term change of trend I believe is underway.


Treasury Bonds (TLT)

30-Year Treasuries are breaking out from a multi-month consolidation.

10-Year Treasury Yields (TNX)

Since 2014 10-year Yields have been in a negative trend environment. Only for a few months last summer did they show any positive price action. As we can see it did not hold and is now resuming lower out of another failed consolidation.

You could make the argument that this is back to a "risk off" posture for the market. Maybe that is true. But I tend to see it more as a continued rotation across sectors with a suggestion that the Federal Reserve will remain easy. A Fed that is supportive of low interest rates and even possibly more Quantitative Easing should provide a tail wind for equities as a whole.

The market remains in a solid position to make new highs.

Every time I have posted something positive about the price action of the SP500 in the last two weeks, the posts have been met with quite a good deal of skepticism. Participants continue to be very hesitant to embrace the recent change of structure to the broad market averages.

We've seen the year-long downtrend line broken and despite this week's "poor" price action (as many seem to be viewing this as a topping formation), the SP500 did manage to post a modestly positive return, consolidating the big gains from the last two weeks. I see NOTHING negative about the recent action and believe the structure currently is the most solid we have seen in over a year.

SP500 30 min

Zooming in on the last two months it appears the "Sell in May and Go Away" folks did they're best to roll the market over. However all they did was set the stage for the Bulls to rally into summer.

It looks like a confirmed Double Bottom formation is in play. While I hear about bearish "Hanging Man" candles on the Daily charts, the underlying price action is showing modest consolidation ABOVE the recent swing high from May. Momentum confirms a pullback within an uptrend as MACD remains > 0. The recent structure reminds me of mid-February when the market broke out from another Double Bottom pattern and managed to rally 60 points over the next few weeks. We could definitely see a similar move.

Breadth continues to improve, moving averages are under price and turning higher, interest rates remain low, Central Banks remain accommodating, and stocks are breaking out of strong base formations. The recipe is in place for higher prices.

Many Growth stocks continue to be positioned strongly and are at all-time highs. If we remember the rules of Trend and Momentum, we know new highs are most often followed by more new highs.

FB

CRM

USPH

TXRH

Bottom line it remains a target rich environment with many stocks resuming higher out of substantial long-term consolidations. Conditions suggest being open to the increased probability of new all-time highs in the broad market indices as interest rates remain low for the foreseeable future.

Thanks for reading
-ZT