Last week I said that stocks wouldn’t be able to ignore the sell-off in bonds for much longer and right on cue we saw US stocks nosedive early this week.
The 200-day moving average in the S&P 500 provided support, so now the battle lines are drawn.
A fall below the 200-day moving average in the short term will increase the chances that a disorderly sell-off could begin.
But while the 200-day moving average holds the volatility could be contained.
I have shown you in recent Closing Bell videos that reversals in interest rates have often been quite sharp in past cycles. That’s because rates rise until something breaks and then the Fed ends up cutting rates quickly to fend off an implosion.
It may be the same thing this time around. We don’t know how high US 10-year bond yields have to go before the economy cries uncle, but it can’t be that far off.
Stocks may plunge below the 200-day moving average as I said above but then you have to be prepared for stocks to turn and rally sharply if rates peak and then fall rapidly.
It could be a wild ride, but it feels like we are finally getting closer to a point that will mark the peak of this rate rise cycle.
Check out the Closing Bell video above where I set out all the key levels to watch going forward and show you different scenarios that could play out.
Editor, Money Weekend