Yields rise, breadth fades, bitcoin pauses

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" while Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

The S&P 500^® Index is down less than 2% from recent all-time highs. Under the hood, however, there's concern. Two key measures of market health—breadth and the Relative Strength Index (RSI)—suffered steep declines in late August that call the rally into question. Breadth is the percentage of S&P 500 stocks trading above their 50-day moving average, and it dropped below 50% after topping 70% in mid-August. And the RSI, a momentum indicator, slipped from above 65 to just over 50 between mid-August and early September. Narrowing breadth partly reflects large retreats in certain sectors like utilities, industrials, real estate, and consumer discretionary over the last month as many investors got cautious about areas of the market most sensitive to rising Treasury yields. Health care and energy picked up some of the slack. With seven of 11 sectors down since early August, the S&P 500 has struggled to move past levels seen mid-month despite info tech—the largest sector by market capitalization—being up 5.4%. Investors like to see a market with strong momentum carried by a host of sectors, and that's not currently the case.

The Treasury yield rally makes "repricing" the main story for stocks. This is less about one stock or sector and more about oil and yields moving higher together, tightening financial conditions and pressuring valuations after a strong August. The market is essentially rethinking how much investors should pay for earnings when inflation and rates are both moving the wrong way. The near-term bias is likely to stay defensive unless crude or yields stabilize. In some ways, the 10-year yield's rise is doing the Fed's work for it by raising discount rates and weighing most on long-duration growth and mega- cap areas like technology. If yields keep rising, investors might demand lower multiples even if earnings expectations remain intact. Meanwhile, higher oil and sticky inflation make it harder for the Fed to sound dovish, so the next inflation and labor reports are key to yields. The risk is that the Fed doesn't need to hike immediately for financial conditions to tighten if bond yields keep doing the work, but the question is whether fundamentals are strong enough to offset the drag from higher rates.

Stock market trading volume is near its lowest levels of the year. Even so, there's plenty of action below the surface. Divergence between volatility of individual stocks and the broader indexes remains high. A recent CNBC report noted that intra-stock correlation in the S&P 500 Index is the lowest on record. On a scale of zero to one, with one meaning complete correlation between stocks and zero meaning none, the current level is 0.10, according to data the network cited, the lowest on record going back to 1990. Much of the divergence is within technology, CNBC noted, as investors continue to take different positions on AI names. "Stock pickers are experiencing a lot more volatility than passive index investors," said Alex Coffey, senior trading and derivatives strategist at Schwab. "I see it as a tug of war under the surface. And until we see that correlation start to recover, it's going to be difficult for the 'market,' meaning indices, to trend higher or lower because the tug of war, or dispersion, is dampening the index volatility and keeping us rangebound." More direction might come after next Monday's holiday when many participants return from vacations.

Bitcoin has held up pretty well after punching through its 200-day moving average two weeks ago, consolidating in a tight, mostly sideways pattern. The question is whether the bottom is truly in and a new bull run has begun. Unfortunately for the bulls, September ranks as the worst month of the year for crypto prices, with bitcoin falling an average of 4% during the month since 2011, said Jim Ferraioli, director of digital currencies research and strategy at the Schwab Center for Financial Research (SCFR). On the plus side, the fourth quarter has been a strong one, with bitcoin hitting its all-time high in October last year. To get back there, it'll have to start by challenging the short-term high around $83,000 reached in May. That's also around the average cost basis for investors in spot bitcoin exchange-traded products, meaning some investors might be looking to sell in that area to get out at breakeven.

A Bank of Japan (BoJ) hike is expected when it meets mid-month as central bankers globally respond to inflation driven partly by the war. For the BoJ, it's also about protecting the yen, which lost about half the gains it made versus the dollar since last month's joint action by the U.S. and Japan to stabilize the currency. "Joint intervention in the yen has slowed, not stopped, yen weakness," and fundamentals suggest the weakness could continue, said Michelle Gibley, director of international equity research at SCFR. Speculators covered some short positions on the joint intervention but remain net short, according to the Commodity Futures Trading Commission. The joint move was partly an effort by the U.S. to prevent money from fleeing Treasuries. The continued combination of a weak yen and rising Japanese yields could slice the premium U.S. yields hold to Japan's. That might lure Japanese market participants into domestic assets and out of U.S. ones.