O'Reilly Automotive is Thursday's IBD Stock Of The Day as rising interest rates add to the strong demand picture for the auto parts retailer. In today's stock market action, ORLY stock rose past a buy point.
Myriad factors have contributed to a strong couple of years for auto parts dealers. Covid has been a boon, shifting demand from public to personal transportation. The return to offices as Covid wanes should mean more driving. Meanwhile, the chip shortage has roiled new auto production, forcing consumers to hold on to and maintain their used cars longer.
But this week's move is all about the surge in the 10-year Treasury yield, a key for auto loans. That should contribute to affordability challenges for new auto purchases, giving people further reason to get more mileage out of their vehicles.
That macro picture fueled a group move, with AutoZone rallying briskly alongside ORLY stock. Laggard Advance Auto Parts has seen more modest gains.
Fed Policy Boost
The 10-year Treasury yield has jumped 27 basis points to 2.65% this week, hitting the highest level in three years. The move came amid more hawkish Fed policy signals. Minutes from the March 15-16 Fed meeting indicated most policymakers preferred a half-point rate hike, not the quarter point they settled on to limit uncertainty after Russia's invasion of Ukraine.
The minutes also spelled out plans for shrinking the Fed's balance sheet at a pace that will quickly ramp up to as much as $95 billion per month. A day earlier, the Fed's Lael Brainard, who President Joe Biden has tapped as vice chair, caught Wall Street off-guard by seeming to describe balance-sheet tightening along with rates hikes as part of a one-two punch in fighting inflation.
That has implications for the 10-year Treasury yield. If the Fed depends more on rate-hikes to slow growth, that would tend to flatten the yield curve, lifting short-term yields. But the reliance on balance-sheet tightening could mean more Fed tightening will be done by raising long-term Treasury yields.
Going On The Offensive
ORLY stock is a defensive play, a relative safe haven during periods of economic uncertainty because people can't do without their car. With inflation running way too hot and the Fed getting ready to hit the brakes, ORLY stock broke out of a cup-with-handle base on March 15.
Yet that breakout quickly stalled, as the broad market rally kicked into gear following the Fed's quarter-point hike on March 16. The rally seemed to be built on optimism that the Fed could tighten just enough to tame inflation without derailing economic growth.
ORLY stock bided its time for a few weeks, lagging the market and falling back to its 50-day moving average on April 1. But the story changed this week, as the 10-year yield spiked and the market rally appeared to falter.
ORLY Stock Gets A New Buy Point
Suddenly, ORLY stock is back in gear. Thursday's 3.7% gain to 726.83 carried shares past a 705.10 cup-with-handle buy point. The current buy point is slightly above the 687.33 handle buy point cleared in March. The somewhat rare pattern, resulting from the market's start-and-stop action, resulted in a second handle below the earlier high of 710.86.
The new buy range runs through 740.36.
This week's 7.7% move for ORLY stock, coming as the S&P 500 lost ground, has lifted its relative strength line near a new high. The RS line is the blue line in the accompanying chart that tracks a stock's progress vs. the S&P 500.
Meanwhile, AZO stock is having the same kind of week. On Thursday, AZO shares rose 2.3% to 2120.04, clearing a 2078.83 buy point from a double-bottom base.
Be sure to read IBD's daily afternoon The Big Picture column to stay on top of the market's prevailing trend and what it means for your trading decisions.
