The yield on the U.S.10-Year Treasury Note held steady through Wednesday of last week and then like a bolt out of the blue it opened 10 basis points (bps) higher on Thursday closing at 1.71% and then added more, 3 bps on Friday according to the U.S. Treasury Resource Center website. While increasing interest rates are now expected, large one-day increases shock the markets. The Market Review includes details along with comments on three booked ETF positions from recent issues.

S&P 500 Index (SPX) 3913.10 declined 30.24 points or -.77% last week after making a new closing and intraday high at 3,983.87 on Wednesday. It remains above the 50-day Moving Average at 3862.11 that it will test on any further decline this week. Should that support fail the next test will come at the operative upward sloping trendline, USTL that now crosses at about 3800.

Last week was the second when the 10-Year Treasury Note yield suddenly jumped up 10 basis points (bps) in one day. After Federal Reserve Chairman Powell's comments on Wednesday 10-Year Treasury Note yield increased just one bps to end at 1.63% as the SPX made new highs. It's not clear what caused a reassessment before the markets opened on Thursday, but it's clear the markets have trouble digesting large one-day increases in interest rates.

Invesco QQQ Trust (QQQ) 313.14 slipped 2.32 points or -.74% almost equal to SPX but it remains below the almost flat 50-day Moving Average at 321.04 that contained Tuesday's and Wednesday's bounce for the second week. With many richly valued high-growth stocks some without earnings, greater interest rate sensitivity creates extra drag as rates increase.

CBOE Volatility Index® (VIX) 20.95 inched up .26 points or +1.26% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added .17 points or +1.07% ending the week still bullish at 15.99% – slightly higher than the week before.

VIX Futures Premium

On Friday the premium ended in the green bull zone at 14.28%, with the new April front-month futures contract, vs. 13.84% at weekend March 12 also in the green.

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, looked encouraging to the bulls advancing for six days until Thursday when it turned lower again, after the interest rate jolt, but still managed to eke out a small gain of 36.82 points or +5.82% for the week.

Booked Positions Review

Energy Select Sector SPDR Fund (XLE) 49.53 dropped 4.04 points or -7.54% last week following crude oil lower. This suggestion first appeared on February 22 in Digest Issue 8 "Crude Oil Uptrend [Charts]." 

As of Tuesday, March 16 and before Thursday's 7% decline, the CFTC Disaggregated Commitments of Traders - Options and Futures Combined, COT report, shows open interest continued increasing as prices advanced, while all the reporting groups, not just those referred to a "speculators" had been reducing short positions while adding longs. It was as if everybody was on the same side of the boat causing it to lean making it vulnerable to a sudden unexpected wave. Apparently, dismal Covid news from Germany and India set off a selling frenzy as traders rushed to right the ship. The next report, this Tuesday will reveal the changes. For the week WTI Crude Oil declined 4.20 points or -6.40% basis of May futures ending at 61.44 per barrel. Last Thursday's decline slightly exceeded the upward sloping trendline, USTL from the November 2 low at 36, intraday day, but then closed back above it, as did Friday's 1.38 point advance. Concluding a trend change last week seems premature until it closes solidly below this trendline.

Remember Saudi Arabia says the production cut will continue through April and as of Friday both WIT and Brent Crude oil futures were still in backwardation meaning the front month's prices are higher than the deferred months, a sign of tight supply.

Consider keeping the position unless WTI declines below the trendline. In addition, April options are now the front-month so an adjustment should be made soon.

ProShares UltraPro Short QQQ (SQQQ) 14.01 up .19 points or +1.37% last week. At 3X short QQQ, it's now just above the 50-day Moving Average at 13.71. Last Wednesday it closed down to 13, but didn't closes below 13, the trigger point to close this position, according to the original trade plan in Digest Issue 10 "Bumpy Ride [Charts]."

Since both Federal Reserve Chairman Powell and Treasury Secretary Yellen are scheduled to testify at a Senate hearing on Wednesday to make the case why the latest fiscal spending package will not likely ignite inflation expectations, the plan is to keep this hedge open to see how the increasingly anxious markets react.

Financial Select Sector SPDR Fund (XLF) 34.22 slipped .55 points or -1.58% last week, advancing Thursday as the yield on the UST10Y Note increased 8 bps, but gave it back on Friday. According to the trade plan in Digest Issue 11"Rotation Evaluation [Charts]" keep the call spread open unless it closes below 33, just above both the 50-day Moving Average and the upward sloping trendline, USTL. Consider it a combination uptrend and long interest rate hedge.

Strategy

In bull markets, the best strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

It's not clear what caused a reassessment before the markets opened last Thursday, but it's clear the markets have trouble digesting large one-day increases in long interest rates as it encourages the rotation process of equalizing sector price-to-earnings ratios.

While long interest rates rise, focus on cyclicals that benefit as the global economy reopens along with financials that benefit from improving demand and a steeper interest rate curve.

Also, keep a close eye on the "harmony twins," – the yield on the U.S 10-Year Treasury Note and the U.S. Dollar Index (DXY) & (DX).

Summary

Another 10-Year Treasury Note yield increase shocked the markets again last Thursday as all of the S&P 500 Index sectors declined except for Financials. Gradual increases in long interest rates in small increments without surprise jumps seem acceptable, but apparently unattainable. A doubleheader tops the event schedule this week with both Federal Reserve Chairman Powell and Treasury Secretary scheduled to testify at a Senate hearing on Wednesday.