SURGE IN RATES PUNISHES STOCKS -- FINANCIALS, UTILITIES, AND GOLD ARE HARDEST HIT -- S&P 500 BREAKS 50-DAY AVERAGE
STRONG RETAIL REPORT PUSHES YIELDS SHARPLY HIGHER... The market may have reached the point where good news is becoming bad news. We got a sample of that today. A 1.8% jump in March retail numbers was three times more than economists were expecting, and the biggest jump in a year. That should be good news. Except that it pushed long-term rates sharply higher. The 10-year T-note yield jumped to 4.34% which is the highest level in three months. The weekly bars in Chart 1 show that yields have now broken the down trendline extending back to last August. That appears to be confirming that the trend of interest rates is turning higher and suggests that rates are headed back up to the highs of last summer. The monthly bars in Chart 2 show that bond yields may also be breaking a four-year down trendline extending back to the start of 2000. One of pillars of the bull market in stocks has been low interest rates. Judging from today's stock market reaction, the market doesn't like the idea of higher rates. That's especially true of rate-sensitive stocks that were the hardest hit. That includes banks, brokers, utilites, and gold stocks. Gold stocks are rate-sensitive in the sense that rising rates push the dollar higher which they did today.
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JUMP IN DOLLAR HURTS GOLD... Rising U.S. rates gave a big boost to the dollar and pushed it to the highest level against the Euro in four months. Chart 3 shows the Euro challenging its 200-day moving average. That dollar strength pushed gold prices $13 lower. Gold recently backed off from an unsuccessful test of its January high near 430. Today's plunge pushed gold into a test of its 50-day average. Gold stocks fell 6% and were the weakest group in the market. The XAU Index is threatening its 200-day moving average. Two of the factors that have been driving the gold market higher are low interest rates and a weak dollar. For the time being, it appears that the trend of rates and the dollar are moving upward. That's a bad combination for gold. Silver prices fell 7% today. The rising dollar pushed the CRB Index down 5.58 points. Sixteen of its seventeen commodities fell.
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RISING RATES HURT FINANCIALS AND UTILITIES... One of the precepts of intermarket analysis is that rising interest rates hurt financials and utilites earlier and harder than the rest of the market. That's because they're rate-sensitive stocks. Charts 4 and 5 show the AMEX Financial and Utility ETFs tumbling today on rising volume. Both are trading under their 50-day averages. The red arrows on their relative strength lines show that both groups started to underperform the rest of market about three weeks ago -- just as interest rates were starting to rise. (See red circle in Chart 6). That's a dangerous sign because rate-sensitive stocks have a history of acting as leading indicators for the rest of the market.
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S&P 500 BREAKS 50-DAY LINE -- SMALL CAPS BACK IN TRADING RANGE... The next chart shows the S&P 500 SPDRs closing back under its 50-day average. And it did so on rising volume. That's a bad combination. Breadth figures were pretty bad as well with big board decliners beating advancers by a five-to-one margin. Today's bad technical action suggests that the recent move up toward the highs of the first quarter has run its course. Small caps fell even harder than large caps. The last chart shows that the Russell 2000 Index has also fallen back toward the middle of its first quarter price range. That negates the brief move into new high ground that took place a couple of weeks ago.
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