All major U.S. indices closed higher again last week, logging the sixth straight week of overall strength. The rally was led by the beleaguered small-cap Russell 2000, which gained 3.3%. 

This is a good overall sign because small-cap and technology stocks typically lead the broader market higher and lower. However, the Russell 2000 still has more work to do. It is the only major index still in negative territory for 2015.

The two strongest sectors last week were financial services, up 3.7%, and financials, up 2.7%. The weakest sector was utilities, which lost 3.4%.

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These sector-related gains and losses were a direct result of last week’s big jump in long-term U.S. interest rates. The yield on the benchmark 10-year Treasury note rose by 18 basis points to finish the week at 2.34%. Rising long-term interest rates benefit lending institutions while attracting yield-seeking investor assets away from riskier utilities.  

I’ll talk in more detail about the direction of long-term interest rates and the effect they could have on financial asset prices later in this report.

Tech Stocks Front And Center Again This Week

Three weeks ago, I pointed out a bullish chart pattern in the S&P 500 that targeted a retest of the 2,135 May 20 all-time high. Following that report, the index rose 4.1% into the Nov. 3 intraday high at 2,116 before backing off slightly to finish the week at 2,099.

Technology stocks are one important factor as to whether the index will meet the 2,135 target — and potentially exceed it. More specifically, the Nasdaq Composite must take out and remain above its March 2000 tech bubble high at 5,133, which was tested last week.

A closer look at the chart reveals this is the fifth time this major overhead resistance level has been tested this year, which speaks volumes about its importance as a major decision point and the probable springboard for the significant trend in the index.  

As stated in last week’s report, if the Composite can stay above 5,133, we are likely to see a nice technology-led broader market rally into year end. However, a failure to do so would warn of yet another pullback, perhaps back to the 200-day moving average at 4,947.

Financials Look Promising 

As I mentioned, the relative outperformance of financial stocks last week was fueled by the big rise in long-term U.S. interest rates as the market prepares for a possible interest rate hike by the Federal Reserve in December. 

I’ve actually been seeing emerging strength in a number of financial stocks over the past few weeks, one of which is insurance and financial services giant MetLife (NYSE: MET). 

The stock broke higher from two months of sideways investor indecision on Oct. 20, indicating investors have collectively decided a near-term bottom is in place at the recent lows. Since then, MET has since risen to test major resistance at its 200-day moving average at $51.77.

A move north of this moving average would clear the way for a rise to $54, which is 4.5% above Friday’s close. This should happen as long as interest rates continue to rise.

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10-Year Yields Spike, Next Stop 2.44%?

For the past six weeks, and most recently in the Oct. 19 Market Outlook, I have been talking about the importance of the 200-day moving average as a major trend proxy in 10-year Treasury yields. I said a sustained move above it would indicate a new trend of rising long-term U.S. interest rates was under way.  

This happened last week as yields rose above the 200-day, which is currently at 2.13%. They also spiked above their 2.30% Sept. 16 closing high on Friday, finishing the week at 2.34%. 

Last week’s move higher portends more strength and a retest of the July high at 2.44%, while a sustained move back above 2.44% would clear the way for a rise to the next key level at 2.63%. Rates reversed lower from 2.44% this summer due to the collapse in the Chinese stock market. I believe a retest and move above this level is likely this month.

If you’re a regular Market Outlook reader, you’ve heard me say the bond market is typically more prescient and forward-looking than the stock market, which tends to trade from news release to news release and is often influenced on a day-to-day basis by high-frequency trading. 

I view last week’s big increase in 10-year yields as the bond market’s blessing that recent concerns about the Chinese economy are behind us, at least for now, and that economic conditions here in the States are improving.

Everyone Out Of The Gold Pool (Again)

In last week’s Market Outlook, I pointed out total net assets invested in SPDR Gold Shares (NYSE: GLD) had contracted slightly below their 21-day moving average. I said this warned of an emerging trend of monthly contraction that is characteristic of price declines and suggested gold bulls take a defensive stance.  

This contraction in assets continued last week, and GLD fell 4.8% into Friday’ lows.

This latest failure appears to be directly attributable to GLD’s inability to rise and remain above its 200-day moving average, a widely watched major trend proxy that has defined its declining trend since 2013. This tells us investors have completely given up on gold’s recent rally attempt — which was fueled by expanding investor assets in GLD between late July and mid-October — and have yielded to its long-term bear market, which still appears to be intact.

Putting It All Together 

The driving factor in financial asset prices last week was rising long-term U.S. interest rates. This was evident in the strong performance of the financial sector, a weak utilities sector and overall strength in the stock market. The forward-looking bond market has apparently discounted immediate concerns about China and is preparing for a December rate hike by the Federal Reserve.  

A sustained rise above 5,133 in the market-leading Nasdaq Composite remains necessary to confirm that the next sustainable intermediate-term stock market advance is under way — one that could carry the market higher into early next year. Continued strength in interest rates is just the fuel the market needs to get there.

This article was originally published on ProfitableTrading.com: What Holds the Key to a Year-End Market Rally?