RHTrading

SPY vs. SPYD - Tectonic Plates Of The Market Are Shifting

AMEX:SPYD   SPDR Series Trust SPDR Portfolio S&P 500 High Dividend ETF
S&P 500 ETF VS. High Dividend Yield ETF

S&P 500 appears to be outperforming from a Year-To-Date perspective
- I propose this is because of the rising interest rate environment and the psychological affect on how Yield for different vehicles is viewed.

What comes around goes around. Interest rate fears were the main source of blame for the increase in volatility back in February.
The 10 Year Treasury Yield has approached about 2.95%. The number that gets a lot of attention is 3.00% but I believe the number that everyone really starts to get nervous about is when the Yield approached about 2.8%. This is where interest rate fears start to resurface and we start to see some sell side activity.

I believe we could reach the 3.00% threshold hit and surpassed as early as next week. It's been a considerable amount of time since we've seen rates that high.
Higher rates could impact pretty much everything in the economy. But one of the things on the surface that people don't really think about is how it affects high dividend yielding stocks.

High market cap / High dividend paying stocks have been experiencing some pretty heavy sell side activity (as we can see in the charts).
*** Why? ***
Well, the idea is somewhat simple. Why would someone go out and purchase an underlying that's yielding 4% when you can now take your capital and put it in a T-Bill, a Note, or some type of Treasury product that's going to yield next to 3.00% without any uncertainty or market volatility .

- The importance of this also comes from the idea that dividend paying aristocrats are supposed to have a lower beta/less risk/less volatility . The Irony is that they're actually MORE RISKY in this rising rates environment and will continue to be.

Yield Curve is beginning to flatten out a bit here. On average, we enter a recession 7-10 months after the curve inverts. Which means the "Top" comes 20% before. Naturally seeking to exit 20% higher vs. waiting for the official announcement of a recession, and looking at the most recent historical inversion:

Date Fed Funds 3-Mo 2-Yr 7-Yr 10-Yr
Dec. 22, 2005 4.25 3.98 4. 40 4.39 4.44
Dec. 30, 2005 4.25 4.09 4.41 4.36 4.39
Jan. 31, 2006 4.50 4.47 4.54 4.49 4.53
Jul. 17, 2006 5.25 5.11 5.12 5.04 5.07

On July 17, 2006, the inversion worsened again when the 10-year note yielded 5.07 percent, less than the three-month bill at 5.11 percent. This showed that investors thought the Fed was headed in the wrong direction.

*** READ ANY ARTICLE FROM 2006, AND RECOGNIZE THAT THEY WERE ALL SAYING THE SAME THING THEY'RE SAYING TODAY IN 2018: "Compared to historical averages, the curve inversion we are experiencing is quite benign. Therefore, there need not be profound concerns that an economic recession will automatically derive from this phenomenon." ***

Recent Inversions in the Treasury Yield Curve:

First Inversion / # Months / Average Inversion / Maximum Inversion
Aug-78 ` 21 -71 -202
Sep-80 13 -78 -142
Jan-82 4 -26 -42
Jun-82 1 -23 -23
Dec-88 6 -19 -40
Aug-89 2 -16 -17
Jun-98 1 -3 -3
Feb-00 10 -30 -48

Average 7 -33 -65
Comment: Earnings have been, and are expected to be largely beats over next weeks announcement-heavy earnings week.

The drumbeat of interest rates will get louder as the vast majority of companies beat. As the drumbeat gets louder, they're going to have to raise interest rates faster than expected, and that's where we're going to see some selling in the bonds.
Selling in the bonds is going to perpetuate more fear in the broader market.