Stocks may struggle until Thanksgiving as bond yields bounce. And one sector in particular is a turkey.

Bulls had hoped that the recent swift 50 basis-point slide in benchmark Treasury yields from 16-year highs above 5%, would sustain a classic end- of-year rally. Before Thursday’s sell-off, the S&P 500 had gained 6.45% in just those eight trading days.

Yet, as Vanda Research notes, one market cohort was not particularly convinced by the early November charge. Retail investors showed some reluctance in chasing the risk-on mood, as the chart below tracking net retail buying and the SPDR S&P 500 exchange traded fund
SPY
shows:

This phenomena is not uncommon, says Vanda, with retail investors often wary at the beginning of rallies that follow a period of widespread market weakness.

“While seasonality does not support the idea that retail investors will re-emerge in numbers into year-end, the extension of this ‘pain rally’ could see some momentum chasing by retail crowds before tax-loss selling will weigh on overall flows in late November and December,” Vanda adds.

And now, such reticence, combined with another jump in implied borrowing costs, means it’s likely stocks may not look too clever in the next two weeks, says Mark Newton, head of technical strategy at Fundstrat.

“Given that yields turned up sharply on poor auction results Thursday, it’s likely that volatility is approaching for both equities and Treasuries and yields could lift into the Thanksgiving holiday,” said Newton in a note published late Thursday.

Technical factors during Thursday’s dive highlighted the fragility of the recent rally, according to Newton.

Similarly to recent days, big tech stocks initially disguised the struggles in other sectors, he notes, “but the large-cap weakness in healthcare
XLV
and consumer discretionary
XLY
into mid-day broadened out to additional weakness by day’s end.”

Ten out of 11 sectors fell in Thursday’s session and market breadth — the number of gainers vs. decliners — finished with one stock rising for every three decliners.

Furthermore, the S&P 500 closed near the lows of the day having presented a bearish engulfing candlestick pattern, Newton observes.

Engulfing candlestick patterns may indicate a market reversal. The second candlestick will be much larger than the first, so that it completely covers or ‘engulfs’ the length of the previous bar.

But it is the surge higher in bond yields that particularly concerns Newton. They appear to have bottomed and could very well move back up to the cycle highs around 5% for the 10-year note
BX:TMUBMUSD10Y.

“Cycles for Treasury yields show a possible short-term peak in December and more meaningful peak in late January/early February ahead of a large decline into next Summer 2024,” says Newton.

And one sector in particular in danger of such higher interest rates is Small-caps, as illustrated by the Russell 2000 index
RUT.

November, to date, marks the fourth consecutive month of Small-cap weakness relative to Large-cap, notes Newton, part of a larger intermediate-term downtrend which has been going on for nearly a decade.

Some investors may be right in considering Small-caps have reached oversold levels, says Newton, but it’s early to own this group for anyone with a timeframe of less than three months. “I suspect that even further weakness happens into December ahead of a much-awaited bounce in the Russell 2000 and S&P Small-cap 600 index, both on an absolute and also relative basis.”

More generally, Newton reckons that the stock market will pick after Thanksgiving, but he reiterates: “Small-caps should be avoided until proper evidence of a larger peak in Treasury yields.”

Markets

U.S. stock-index futures
ES00,
+0.19%

YM00,
+0.25%

NQ00,
+0.05%
are mixed as benchmark Treasury yields
BX:TMUBMUSD10Y
inch higher. The dollar
DXY
is little changed, while oil prices
CL.1,
+1.14%
rise and gold
GC00,
-0.91%
falls.

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The buzz

U.S. economic data due on Friday includes consumer sentiment for September, at 10 a.m. Eastern.

Fed speakers include Dallas Fed President Lorie Logan at 7:30 a.m. and Atlanta Fed President Raphael Bostic at 9 a.m..

The U.S. arm of the Industrial & Commercial Bank of China
1398,
-0.81%
was hit by a ransomware attack, reportedly causing disruptions to the U.S. Treasury market on Thursday.

Unity Software Inc.’s
U,
-3.15%
stock is plunging 13% after the company announced revenue that missed analyst forecasts and refrained from offering guidance in a letter to shareholders.

Shares of Plug Power Inc.
PLUG,
-1.50%
are down nearly 30% after the fuel-cell company posted a wider quarterly loss and lower-than-expected revenue, saying it faced “unprecedented supply challenges.”

Shares of Diageo
DGE,
-14.73%

DEO,
+0.16%
dropped 13% after the giant drinks group, whose brands include Guinness and Johnnie Walker, issued a profit warning following slowing sales in Latin America and the Caribbean.

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The chart

The U.S. WTI oil price fell below $75 a barrel midweek, a slide that Evercore ISI described as a “shocking development without a crystal clear explanation.” Perhaps the fall was due to the market pricing an impending reduction in geopolitical tensions or a warmer-than-normal winter once again, or the possibility of a recession drawing near, Evercore suggests.

Whatever the reason, Evercore produced the chart below that shows how airline stocks, as shown using the JETS exchange traded fund, tend to track the oil price closely. (The JETS ETF is inverted to show stocks fall as the cost of fuel rises).

Evercore asks: Does this mean airline stocks are about to take flight?

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

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