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Apple Stock: Yields Flash Green Light For Rally

While monetary policy is expected to tighten next, the Apple Maven believes that Apple stock will benefit from an imminent, even if short-lived, pullback in yields. Here are the details.

The September market jitters may have reached an end. After the S&P 500  (SPY) - Get SPDR S&P 500 ETF Trust Report pulled back slightly more than 5% between last month’s peak and the end of third quarter, the index has already marched ahead: up 3% in October through late morning trading on Thursday.

Looking back at a study that I did on treasury yield movements, I have reasons to believe that investors will witness a short-term rally in growth and tech names like Apple stock  (AAPL) - Get Apple Inc. (AAPL) Report. Below, I explain why.

Figure 1: Apple store in New York, NY.

Figure 1: Apple store in New York, NY.

(Read more from the Apple Maven: Why iPhone Supply Hiccup Is Not A Problem For Apple Stock)

Yields could ricochet

Make no mistake: now is the time to talk about the tightening of monetary policy and short-term interest rate hikes. The Federal Reserve has already hinted at “a gradual tapering process” (i.e. less liquidity infusion into the system) to begin as early as next month.

But looking at recent market action, it looks like treasury yields, particularly the 10- and 30-year rates, have already reacted to adapt to the Fed’s highly anticipated hawkish moves. The 10-year yield, for example, has climbed from around 1.17% only ten weeks ago to 1.61% on October 10.

In my previous study, using the 30-year rate, I concluded that sharp moves in yields tend to revert to a mean in the short term. In fact, on March 12, after interest rates shot through the roof in the first quarter, I called for an imminent drop in yields. The decline ended up happening exactly as planned over the next quarter or so – when most everyone else on financial media incorrectly predicted the opposite.

The same seems to be taking place now. The graph below shows that the month-over-month rise in the 30-year rate has possibly gone too far and too fast. Should history repeat, this could be a sign of an imminent pullback in yields, even if short-lived. In fact, long-term interest rates have started to ease in the past couple of days, from 2.17% on October 11 to 2.02% on October 14, as I type this sentence.

Figure 2: 30-year yield movements, past 5 years.

Figure 2: 30-year yield movements, past 5 years.

(Read more from the Apple Maven: Apple Will Drop The Mic This Earnings Season)

Impact on Apple stock

“So what?”, may ask the reader. During this period of recovery from the COVID-19 crisis, growth tech stocks seem to have been often impacted by movements in yields. When rates rise (think February and March 2021), names like AAPL sink. When rates dipped (think May through July 2021), Apple stock and its peers have climbed.

I have talked about this subject regularly on this channel. Back on June 3, I suggested that “Apple stock was ripe for a rally”, and the main factor backing up my call were yields that had stabilized (as they may have now). Over the following six weeks, AAPL immediately bottomed at $124 and peaked at $150.

Today, AAPL sits about 9% below the early September all-time high, and the future is obviously uncertainty. However, judging by how fast yields have climbed lately and how likely I believe they are to correct lower, I would not be surprised to see Apple stock climb out of its current drawdown in the foreseeable future.

Twitter speaks

The Apple Maven has called it: yields are more likely to pull back slightly in the short term after climbing viciously lately, which should benefit Apple stock. What are your thoughts?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)