Yields Cut a Path for Energy Stocks

From the Desk of Ian Culley @IanCulley

Investors navigate a market of stocks, not a “stock market.”

Equity indexes slide, and US treasuries collapse against a rapid rise in interest rates. Unfortunately for the bulls, the charts show no signs of an imminent change in these underlying trends. 

That’s the environment, and there’s no use fighting it.

Have no fear: We can still lean into market areas that enjoy a rising rate environment, mainly energy.

Here’s the US 30-year yield breaking to its highest level since the summer of ‘07:

Rising rates are the market’s golden thread.

Owning the stock market averages will prove difficult as long as yields press higher.

The same story applies to bonds, as rising yields directly equate to falling bond prices.

Check out the US 30-year bond futures flashing one sell signal after another:

A shelf of former lows at approximately 105 marks our next downside target.

I like remaining short the 30-year bond toward our next objective. But only if it trades below 111.

Unsurprisingly, energy-related stocks have caught a bid while bonds and stock indexes retreat beneath the brisk climb in rates.

Yet the Energy sector ETF $XLE hasn’t even broken out yet!

I’ve covered numerous individual names, outlining trade ideas for each. Many of those trades are working. But we can’t own XLE until a decisive close above 95. 

The 30-year yield has cut a clear path to fresh highs for these inflationary assets.

Let’s see if energy stocks follow in the coming weeks and months.

Stay tuned!

Countdown to FOMC

The market is pricing in a pause in the hiking cycle through Q2 of next year as the probability of another hike by December decreases.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of October 20, 2023.

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