• Investing
  • Stock
Round Table Thoughts
  • Economy
  • Editor’s Pick
Home Stock Two ETFs That Could Thrive Based on a Normal Yield Curve
Stock

Two ETFs That Could Thrive Based on a Normal Yield Curve

by December 6, 2024
by December 6, 2024 0 comment
Share
0
FacebookTwitterPinterestWhatsapp

My recent discussions on the Market Misbehavior podcast have often included some comments on the interest rate environment, particularly the shape of the yield curve.  We’ve had an inverted yield curve since late 2022, and so the yield curve taking on a more normal shape could mean a huge tailwind to certain sectors and groups.  

When the Yield Curve is No Longer Inverted

Here we’re showing the Ten Year Treasury Yield along with two ways to show the shape of the yield curve by comparing different durations.  The first panel below the price compares the 3-month yield to the 10-year yield, and the bottom panel shows the 2-year yield versus the 10-year yield.

Back in 2022, both of these spreads went below the zero line, indicating that the yield curve was inverted because long-term yields were now lower than short-term yields.  Due to the Fed raising short-term interest rates to try to bring inflation in check after the COVID pandemic, along with a general downtrend in bond prices, this inverted shape to the curve raised fears among investors for a recession.

With inflationary pressures fairly subsiding into late 2024, the Fed has now begun lowering short-term rates, which will most likely cause the yield curve to regain a normal shape.  As we can see from the Dynamic Yield Curve tool on StockCharts, the yield curve moving back to a normal shape can often lead to lower stock prices in the short-term.  However, two ETFs come to mind that should do better in this new market phase.

Regional Banks Get a Major Tailwind

The financial sector in general experienced a particularly weak start to the year, with financials underperforming growth sectors into the summer.  But regional banks have begun to mount a fairly strong rally in Q4, perhaps reflecting optimism going into 2025.

The SPDR S&P Regional Banking ETF (KRE) has shown a series of breakouts in 2024, including a new 52-week high in July on strong momentum, as well as a gap higher in early November.  KRE now sits above two upward-sloping moving averages, and the RSI suggests strong but not excessive momentum.

Regional banks essentially borrow money at the short end of the curve, then lend those funds out to individuals at the long end of the curve to buy houses and make other large purchases.  A steeper yield curve would imply a much more hospitable environment for regional banks, which could mean much further upside for KRE.

Small Caps Could Thrive Given Sector Weightings

While the S&P 500 and Nasdaq are both heavily weighted in growth sectors like technology and communication services, the small cap indexes feature much more of a balanced exposure to value and growth stocks.  As guest Tom Bowley pointed out on our podcast, Smaller companies usually need to borrow money, so lower rates could mean a better environment for small caps as well.

Here we’re applying our Market Trend Model to the iShares Russell 2000 ETF (IWM).  Similar to our main Market Trend Model using the S&P 500, we can see that small caps have shown bullish signals on the long-term and medium-term models for all of 2024.  While the short-term model has turned negative a number of times this year, the model currently indicates short-term strength.

The key with small caps is the relative strength, which measures whether the IWM is actually outperforming the S&P 500.  While small caps have been moving higher in the second half of the year, they have still been underperforming large caps.  However, given this shift in interest rates, we could be heading into a new year where small caps represent a decent opportunity to outperform the SPX.

RR#6,

Dave

PS- Ready to upgrade your investment process?  Check out my free behavioral investing course!

David Keller, CMT

President and Chief Strategist

Sierra Alpha Research LLC

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice.  The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.  

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

You Might Also Like
  • Market Internals Point to Large Growth Leadership
  • Are the Seven Still Magnificent?
  • How the PROS Time Entry Points
  • Coinbase’s Stock Price Could See a Sizable Move: Time to Seize the Opportunity?
Share
0
FacebookTwitterPinterestWhatsapp

previous post
CSCO Stock: A Hidden Gem With Upside Potential
next post
What Fed chief Powell said about crypto that may have aided bitcoin’s rally to $100,000

You may also like

Nasdaq/NYSE Volume Ratio Says No Price Bottom Yet

March 9, 2023

Market Rally or Fakeout? How Politics and Earnings Are Driving...

April 12, 2025

The Bears Are On Life Support And Hoping For A...

March 23, 2023

The Best Five Sectors, #2

January 10, 2025

Here’s How to Trade Gaps Up After Earnings!

February 3, 2024

Heed This Warning!

April 21, 2023

DexCom Stock Rises From the Ashes: A Breakout You Can’t...

January 17, 2025

Follow Key Earnings Reports this Season with the Earnings Calendar!

January 16, 2023

Predicting Tomorrow’s Price Movements Today: Introducing the Williams Cycle Forecast

August 30, 2023

It’s been a long time Mr Bear, where have you...

August 2, 2024

    Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.


    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Dick’s Sporting Goods stands by full-year guidance — even with tariffs looming

      May 28, 2025
    • Top Sectors to Watch + The 18 SMA Setup Every Trader Should Know

      May 28, 2025
    • Macy’s CEO says retailer will hike some prices as tariffs cut into profits

      May 28, 2025
    • 23andMe to delist from Nasdaq, deregister with SEC

      May 28, 2025
    • Walmart fined for shipping realistic toy guns to New York, violating state law

      May 28, 2025

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be...

      June 27, 2024 2,763 views
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as...

      August 9, 2024 2,470 views
    • 3

      Biden appointee played key role in recruiting Chinese...

      June 25, 2024 2,449 views
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful...

      July 10, 2024 2,427 views
    • 5

      Harris VP pick spent years promoting research facility...

      August 29, 2024 2,305 views

    Categories

    • Economy (7,009)
    • Editor's Pick (2,101)
    • Investing (538)
    • Stock (2,576)

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be revived under new House GOP bill

      June 27, 2024
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as Harris camp blasts ‘lying’ critics

      August 9, 2024
    • 3

      Biden appointee played key role in recruiting Chinese businesses to Delaware: ‘Longtime friends’

      June 25, 2024
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful of Chinese spy threats

      July 10, 2024
    • 5

      Harris VP pick spent years promoting research facility that collaborated with ‘Chinese military company’

      August 29, 2024

    Latest News

    • Dick’s Sporting Goods stands by full-year guidance — even with...

      May 28, 2025
    • Top Sectors to Watch + The 18 SMA Setup Every...

      May 28, 2025
    • Macy’s CEO says retailer will hike some prices as tariffs...

      May 28, 2025

    Categories

    • Economy (7,009)
    • Editor's Pick (2,101)
    • Investing (538)
    • Stock (2,576)

    Disclaimer: RoundTableThoughts.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2024 RoundTableThoughts.com. All Rights Reserved.

    Round Table Thoughts
    • Investing
    • Stock
    Round Table Thoughts
    • Economy
    • Editor’s Pick

    Read alsox

    Breadth Analysis Suggests Pullback From S&P...

    November 23, 2023

    Will the S&P 500 Push Above...

    December 9, 2023

    Why the S&P 500 Won’t Break...

    October 25, 2024
    Sign In

    Keep me signed in until I sign out

    Forgot your password?

    Password Recovery

    A new password will be emailed to you.

    Have received a new password? Login here