The stock market continues to ignore the significant rise in both long-term yields and crude oil prices. However, history tells us that this is something that will eventually have a meaningfully negative impact on equities.
Natural gas rallied strongly yesterday. We highlight the resistance levels to be watching going forward…which, if broken, would signal a key breakout. We also highlight one stock which would benefit quite nicely if this commodity does indeed breakout.
What started out as a rough day in the markets yesterday…got some relief on reports that the US and Iran are discussing a phased deal to reopen the Strait of Hormuz and end the blockade. This helped oil decline and long-term yields pullback as well. This change in direction in those two markets did not last very long…as crude oil bounced back…and bond yields pushed back to their highest level of this cycle. In fact, the yield on the 10yr note closed at its highest level since 2007…and the 30yr finished the day at its highest level since 2004.
However, the stock market was able to maintain its bounce…and although it finished the day pretty much unchanged, it was still able to fight off these moves in the fixed income and commodity markets…and avoid a revisit of the morning lows. In other words, the stock market continues to brush off the outsized rise in both long-term yields and energy prices. So, when you combine this…with the fact that S&P 500 and the NDX Nasdaq 100 are still within a whisker of their all-time highs…it is giving investors a lot of confidence.
The problem is that this is what always happens when yields rise in a significant way. Investors are always able to ignore this rise for a period of time. In fact, that “period of time” usually lasts many, many months. That was the case in 1987, 2000, 2007, 2018, 2020, and 2022…but each time, the stock market eventually took notice…and decline in a significant way.
This is a theme we have been highlighting for a while now, but since yields are pushing even higher, we think it’s important to reiterate these concerns. This is especially true given that that there are so many other developments that are taking place right now…which tend to show up as the stock market is forming a top of some importance. As we highlighted yesterday, the high yield market continues to deteriorate…and the HYG high yield ETF fell in a material way once again yesterday. (This is another area where the stock market tends to ignore a negative move for a while…but it eventually (pretty much always) has a negative impact.)……When you pile on top of this, high valuations…a very narrow rally…a divergence between the S&P 500 and the chip stocks…and major geopolitical uncertainties…the thought that a further rally of significance over the coming months is getting harder to justify.
We’ll have a lot more in our weekend piece, but we wanted to highlight the very large rally in natural gas yesterday. This commodity jumped more than 9%...which took it out of the sideways range it had been in for the past 6-7 weeks. The main reason for this move was a short squeeze…following a force majeure notice issued by TC Energy’s Columbia Gas Transmission pipeline in Appalachia…after a natural gas leak was detected at the Saunders Creek Regulator station in West Virginia. However, tight inventories in Europe…supply cuts from Norway…and lowered gas production and export forecasts from Russia…are reasons to think that this rally could see some more momentum as we head into the winter heating months in Europe and other parts of the northern hemisphere.
What we’ll be watching is to see if natural gas can push above its 200-DMA in a significant way. That moving average provided very tough resistance back in June and early July. So, if it can break above that line…which would also give it another key “higher-high”…it will signal an important breakout move. (First chart below.)
If (repeat, if) that happens, there are a few stocks which should benefit quite nicely. One of them is EQT Corp (EQT). They are well positioned as the lowest cost, largest-scale US gas producer at a moment of accelerating demand (LNG, power, data centers)…and they also have a deleveraging program which should be able to unlock significant capital returns…especially if nat gas does indeed move higher this winter……On the technical side of things, the stock is coming off a very oversold level after making a nice “higher-low”……We do admit that the stock will have to regain its trend-line from last year to confirm a breakout has taken place…but if natural gas can indeed breakout, EQT should follow very quickly. (Second chart below.)
