Last seen on April 4 at -1 basis point , the dreaded inversion when the yield on 2-year U.S. Treasury Notes exceed the yield on the 10-YearNotes continued into positive territory last week relieving some pressure from the most interest sensitive sectors of the market. Longer dated Notes increased faster than the short dated Notes ending last week with a positive spread of .36 [(2.83 +13 bps) - (2.47 +10 bps)] despite yields on both the short and long end increasing. Apparently, the equity markets reluctantly accept rising rates as long as the short rates don't rise faster and produce inversion.

Both the Consumer Price Index at 8.5% compared to last March released Tuesday, and the Producer Price Index up 11.2% released Wednesday explain last week's rising interest rates.

The second big event last week occurred in the Natural Gas market when near month May futures closed at 7.30/MMBtu up 1.022 or +16.3% making a new 13 year high. Few can support the claim that it's not overbought and due for a pullback since colder than expected U.S. spring temperatures delayed rebuilding already tight inventories that now down -24.3% year over year and -17.8% below the 5-year average. In addition, high coal prices and the risk that gas supplies to Europe may be disrupted also supported prices.

S&P 500 Index (SPX) 4392.59 declined for the second week dropping another 95.69  points or -2.13% to end the week well below the 200-day Moving Average at 4495.27 and the 50-day Moving Average at 4418.38 after failing to push decisively through resistance near 4545 going back to September 2 of last year. Now near the middle of a range between the March 29 high at 4637 and the February 24 low at 4415, should it reverse and turn higher again on upcoming earnings reports, a potential Head & Shoulders Bottom pattern could emerge on closes back above 4637 with a measuring objective higher than the January high at 4818.62, as unlikely as that seems in a rising interest rate environment. However, should it continue lower and close below 4415 the picture would change dramatically as the bears take over.

IVolatility Implied Volatility Index, IVX using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, increased 2.00 points or +11.44 % ending at 19.48% with the 20-day historical volatility also called realized volatility at 16.53% down 7.71%. IVX began trending higher last November as the SPX turned lower then dropped below 20% on the March rebound. The bulls should be happy with IVX closes under 20%.

Summary

Watch the 10-2 Treasury Note spread. While yield curve inversions simply reflect short interest rates increasing faster than long rates, it can be useful to set the stage for the current inflationary environment and expectations for higher interest rates that risk causing a recession.