Wednesday's Market Minute: The Two Most Important Market Trends Are On The Verge of Breaking

Let's put the recent Nasdaq strength into context. It's impressive, no doubt. Bond yields have flattened, and growth stocks have regained momentum with the help of resurgent valuations. I've been as surprised as anyone by the sustainability of the recent move. Up until Monday, Nasdaq futures were making new records on declining momentum. In some instances, that can indicate bearish reversal – as it did with bitcoin in April – but with the index now trading at an overbought technical level, bears have lost one of their few remaining arguments. But there is still one hurdle in front of growth stocks that, if cleared, could unleash even more intense buying in the Nasdaq.

Plot the ratio of growth to value stocks (I'm using SPYG and SPYV ETFs), and you'll see a steady downtrend in favor of value since the frothy September peak last year. Look at the 10-year yield, and there's an obvious trendline connecting the lows of the yield back to the bottom of the chart in August. The recent growth/Nasdaq rally actually still technically fits within these broader, almost year-long trends.

The 10-year bottomed out last year prior to the development of a Covid vaccine, as the Federal Reserve said it would embark on an average inflation targeting policy. The FOMC also decided at that time not to add any more bond-buying to its QE program. Shortly thereafter, when it looked like the summer Covid wave may be the last, growth stocks tanked, and value stocks began a period of outperformance that peaked in March and managed to outperform during the winter Covid wave as economic data still beat expectations.

The yield right now is about as low as it can go and growth stocks as high as they can go, before these trends are violated. These are really important trends. In fact, they're probably the two most important charts in the investing world. They are very clearly interlocking pieces of a two-piece jigsaw puzzle that describes how the market has adapted to a post-COVID reality, and they're about to break. What's it mean if they do?

Given that the Nasdaq is rallying as we approach this threshold, it stands to reason that crossing the line would be at the very least a short-term positive for the index, and would result in even hotter momentum readings and higher valuations. But I am still dubious as to whether it can last. No matter how much growth potential a stock may have, it eventually needs the economy to support it, and I have trouble finding confidence in the economic outlook if the 10-year Treasury suddenly dives through a year-long uptrend. With cyclical stocks and reopening trades selling off lately, there is already reason to believe the drop in bond yields is more than just a reaction to policy and maybe giving us a warning about the state of our post-Covid recovery.

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