Despite the 10-year Treasury yields moving lower last week, stocks are flat
“A JPMorgan survey released on Wednesday added emphasis to growing fears in the $29 trillion Treasury market. The poll’s all-client category for outright short positions—which includes central banks, sovereign wealth funds, real money and speculative traders—has climbed to the most since around mid-February. Fueling that doubt is the US losing its last top credit score, passage in the House of a spending bill that would add trillions more to an almost $37 trillion national debt, and a steep selloff in Japan’s super-long bonds.”
– Bloomberg Evening Briefing, May 28, 2025
Stock market participants are cautious due to fears of rising interest rates. This has investors wondering if the next major move in bonds is higher (yields lower), and if equity prices will rise as well.
Market positioning is at its most bearish since mid-February. This pessimistic extreme on bonds preceded a major short-term move lower in the 10-year Treasury bond yields from the mid-February high of 4.6% to the early March low of 4.1%.
During that period, stocks moved lower with yields. However, with 10-year Treasury yields moving lower last week, stocks are flat. This happened despite a poor reaction in the stock market to benign inflation data Friday morning, which was supportive of bonds.
The S&P 500 Index (SPX – 5,911.69) found support at its 200-day moving average two Fridays ago, but in eight of the past 13 trading days it has touched the level that coincides with the 2024 close at 5,882, as it trades in a sideways grind.
Bulls might find frustration in the lack of upside movement the past several sessions, especially after the bullish “outside day” on May 19 that has historically produced bullish price action two weeks after a signal.
Bears might be frustrated too, as neither the stock nor bond markets have responded negatively to non-supportive macro headlines during the past couple of weeks. This includes the U.S. losing its top credit score, a spending bill proposal that is generating deficit worries, ongoing tariff uncertainty related to the Justice Department, trade talks with China stalling, and accusations of China’s non-compliance.
Such headlines could have easily sent bond yields higher and stocks back below the 2024 close for a sustained period, but that has not yet been the case.
We enter the first week of the month and final month of the quarter with the SPX trading roughly 89 points below resistance at the round 6,000-millenium mark, which is also in the vicinity of the pre-Inauguration close in January.
Plus, this level is 128 points above support at 5,783, the site of its 200-day moving average and the November Election Day close. As such, the technical backdrop in the short-term is neutral, given the index enters the week above its 2024 close but has slightly more downside potential to support at 5,783 than upside potential to 6,000.
On the sentiment front, two options-related indicators favor the bears. This suggests that a portfolio hedge might be worth considering, with the CBOE Volatility Index (VIX – 18.57) trading in the vicinity of its March low, indicating options are relatively cheap when compared to portfolio protection prices in April.
The first is the 10-day, buy-to-open put/call volume ratio on SPX components that is currently turning higher from a level indicative of extreme optimism. The recent low in this ratio marked short-term peaks for the SPX on multiple occasions during the past couple of years, as seen on the graph immediately below.
The second indicator is related to whether a predominance of put or call activity is occurring on the SPDR S&P 500 ETF Trust (SPY – 589.39) for those with a one-week or less time frame. Last Tuesday’s post-Memorial Day gap spurred heavier call activity than put activity on the SPY among those focusing on the just expired May 30 options (see first chart below).
During periods of market strength, we usually see an abundance of put activity relative to call activity, as put sellers establish a floor and put buyers bet against the market, which eventually leads to short covering as those puts expire.
Countering the bearish interpretation is short interest, which for the past couple of years has been the biggest risk to short- and long-term bears.
Per the second chart below, short interest on SPX components continues to build, with the SPX still in a longer-term uptrend. In fact, it rose nearly 3% in the first half of May and is up 33% year to date, with the SPX roughly flat for the year.
Short interest represents future buying activity; therefore, it is generally viewed as bullish when at high levels amid an uptrend. If short covering or continued short interest accumulation is occurring amid a major technical breakdown, it would be viewed differently. But for now, a multi-year high in short interest amid a long-term uptrend should be considered bullish for short- and long-term investors.
Todd Salamone is Schaeffer’s Senior V.P. of Research
Continue Reading: