The Fed cut interest rates 25-basis points today to 3.75% and stocks have not responded favorably. The heavy action has come in the 5-year bond and YIELD ($FVX.X) as we have seen some sharp selling in the shorter-end of the bond market. I think this can be a positive for equity bulls in the coming session as some money is at least coming out of the safer end of the bond market. What equity bulls want to see going forward is for the 10-year (TNX.X) and 30-year (TYX.X) yield to also rise. The reason I point this out is that today's 25-basis point cut may be viewed by some as "non stimulating" and we could see money from the 5- year YIELD at 4.75% just rotate to a higher YIELD in the 10-year or 30-year bonds. If we see a "group move" in YIELD to the upside (selling in bonds) then we begin to think that money could rotate to stocks.
5-year YIELD Chart - 60-minute interval
There's been more action in the bond pits than there has been in stocks. The 5-year YIELD rocketed higher (selling in the bond) but right when it reached our retracement bracket level at 4.78% it seems like there was a big buyer at that level. What equity bulls want to see from here on out is a rising 5-year YIELD that will tell them money is trying to leave this safe haven. What they also want to see is the 10-year YIELD (TNX.X) and 30-year YIELD (TYX.X) also move higher. Equity bulls can't just watch the 5-year and think all is OK. Equity bulls need to see money leave the bond market! We have seen the YIELD on the 10-year edge higher too after the Fed rate cut and this is a good sign for equity bulls. My fear just after the Fed cut was that the 10-year YIELD and 30-year YIELD weren't really budging and that we might have been seeing money just jump from the 5-year to the 10-year and 30-year higher YIELDS thinking the economy was going nowhere and money was just seeking out a higher YIELD while it waited for some sign of a recovering economy. We will continue to monitor things very closely here in the coming sessions. Things are looking OK for bullish traders to be taking partial positions in stocks that have favorable supply/demand characteristics.
Have you ever been on one of those flights were the plane comes in at too steep an angle and ounces down the runway? That's the type of landing the Airline Index (XAL.X) is trying.
Airline Index Daily Chart
After completing a double top, the Airline Index went into a nosedive for two and half weeks that touched the March low of 132. The index has now bounced off that support level, and is trying to climb higher. How high can it climb? Maybe as high as 140 like it did at the end of March, which would also retrace 38% of this last decline.
Continental and United Daily Charts
If airline stocks can continue to rally, Continental Airlines (NYSE:CAL) might be able to climb as high as $47 before attracting some selling. $36 might be a bit optimistic for United (NYSE:UAL). UAL could move up in increments of a dollar, $32.50, $33.50, and $34.50. $34.50 is the critical area, since that is the gap that formed back on 6/12/01.