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Is This Stock Market Bounce Real?

Money & Crisis

March 01, 2021

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Is This Stock Market Bounce Real?

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Is This Stock Market Bounce Real?

Graham SummersDear Money & Crisis Reader,

Stocks are getting some relief from Treasury yields’ recent pullback.

As I’ve been noting for several weeks now, a rise in these yields posed a MAJOR threat to the stock market rally

Why?

Because the yield on U.S. Treasuries, particularly the 10-year U.S. Treasury, represents the “risk-free” rate of return for the global financial system. This means that all risk assets, including stocks, are priced based on where these yields are trading.

So, as U.S. Treasury yields rise, stocks become less attractive as an asset class. This is particularly true when you consider that the U.S. now has over $27 trillion in debt and a debt-to-GDP ratio of 130%.

And as I’ve been noting for several weeks now, Treasury yields have been rising aggressively.

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Indeed, the yield on the 10-year U.S. Treasury has almost TRIPLED since August 2020.

Chart: 10 Year Treasury Yield

Two Signals We Want to Watch

The BIG concern for stocks was that this situation was beginning to get unruly. Even when stocks fell, capital was NOT flowing into bonds, which meant bond yields continued to rise, worsening the situation.

Last week’s bloodbath in stocks finally resolved this situation — a little bit. Bond yields began to come down for the first time in weeks.

Chart: Yields Have Pulled Back

This is what has stocks rallying hard this morning. The bigger question is whether or not it will last.

The two charts I’m watching are Tesla (TSLA) and the 20-Plus Year Treasury Bond ETF (TLT). TSLA needs to break back above its 50-day moving average and TLT needs to rally hard.

Chart: TSLA/TLT

If those two things can’t happen, this bounce is NOT the real thing.

Best Regards,

Graham Summers

Graham Summers
Editor, Money & Crisis

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