FALLING RATES MAY BE BOOSTING FINANCIAL SHARES -- SO DOES THE DROP IN COMMODITY PRICES AND A BOUNCING DOLLAR
FINANCIALS JUMP ON STRONG VOLUME... News of the merger of JPM and Bank One may have contributed to today's jump in the financial sector because it was the day's top gainer. For the record, JPM lost ground on heavy volume while Bank One jumped on strong volume. As a group, banks and brokers had a good day. Chart 1 shows the AMEX Financials Select Sector SPDR jumping to a new 52-week high on rising volume. The daily RSI is overbought, but the trend is still up. The relative strength line along the bottom shows that the financials have been underachievers for the past couple of months. Today's jump in the RS line may be signalling new leadership by the group. The monthly bars in Chart 2 show that the Financial ETF has already exceeded its early 2002 peak and is headed toward its early 2001 peak at 30.01. That's less than 5% from tonight's close. The relative strength line on the monthly chart shows flat relative performance by the financials since last summer. Interestingly, that's the point when long-term rates started jumping. The recent drop in rates may be giving a boost to this rate-sensitive sector.
Chart 1
Chart 2
LONG-TERM RATES DROPPING... After spiking last summer, the 10-year T-note yield has been trading sideways. Over the past week, however, yields have started dropping again. The 10-year yield has fallen under 4% for the first time since October and is trading under its 200-day moving average. The prospect for higher rates since last summer may explain the poor performance by the financials. The drop in rates over the past week may also explain the new interest in financials. The sudden drop in commodities -- and a rebound in the dollar - may also be helping.
Chart 3
COMMODITIES ARE CORRECTING... Commodity prices fell pretty heavily today. The biggest losers were energy and precious metals. Gold fell $13 while gold stocks lost 4%. After trading higher this morning, energy prices tanked. Natural gas and heating oil lost 8% and 3% respectively. Crude oil fell $1.00. As a result, gold and energy stocks were among the day's biggest losers. That explains why the Materials and Energy were the day's two weakest sectors. Both are reacting to overbought conditions. And their relative strength lines have started to drop. Weakness in commodities -- and commodity-related stocks -- usually translates into stronger action in financial shares.
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OVERSOLD DOLLAR HURTS OVERBOUGHT GOLD... The dollar and gold trend in opposite directions. For several months, the falling dollar has boosted gold. Over the short run, however, their roles have reversed. The Dollar Index is bouncing from an oversold condition. The 14-day RSI line has moved back over the 30 which is usually a sign of a short-term bottom. The daily MACD lines have turned positive. At the same time, gold's RSI line has fallen under 50 and its MACD lines have turned negative. These appear to be short-term reversals as opposed to major ones. New buying of the dollar, however, does push commodity prices lower and bond prices higher. That's bad for commodity stocks, but good for financials.
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