BLUE CHIP AVERAGES MOVING ABOVE TRADING RANGES -- BOND YIELDS PULL BACK ALONG WITH THE DOLLAR -- MATERIALS ARE DAY'S TOP GROUP -- LOUSIANA PACIFIC BREAKS OUT
BOND BUYING PULLS YIELDS LOWER... This morning's strong job report is having a positive impact on both bonds and stocks. The bullish impact on stocks isn't surprising. The impact on bonds may be. Bond traders are encouraged by the absence of upward wage pressure which helps keep inflation down. It's a good thing. Because Chart 1 shows the 10-year T-note yield backing off from its high reached in early December. Today's drop in bond yields (and bounce in bond prices) has prevented an upside breakout in bond yields and a breakdown in bond prices. When yields drop (as in Chart 1), bond prices rise. Chart 2 shows the 7-10 Year T Bond ETF, which is a mirror image of Chart 1, bouncing off its early December low. Today's bond action has helped the blue chip stock averages break out of their recent trading ranges to the upside. It's also giving a boost to interest-rate sensitive shares like financials and utilities. That positive view on inflation may be a bit premature however. That's because the dollar is falling today and commodities are rising again. Gold and basic materials are the day's strongest groups. That's inflationary.
Chart 1
Chart 2
DOLLAR FALLS AS GOLD RISES ... Foreign currencies are rising against the dollar today (as the dollar falls). Chart 3 shows the Euro climbing back over its 50-day moving average. The Canadian dollar and the Japanese yen are also rallying. The Euro has an especially close correlation to the gold market and gold stocks. You can see that visually by comparing Charts 3 through 5. Gold and gold stocks are rallying along with the Euro. Gold stocks are up close to 3% today and are the day's strongest industry group. They're part of the basic materials group which is the day's strongest sector. Two of the day's top performers are Freeport McMoran Copper & Gold, which broke out earlier in the week, and Louisiana Pacific which is breaking out today.
Chart 3
Chart 4
Chart 5
LOUISIANA PACIFIC BREAKS OUT... The rising price of lumber may finally be having an impact on Louisiana Pacific. Its chart shows the stock breaking through its October peak to achieve a new 52-week high. Its relative strength line also appears to be turning up. Chart 7 is even more impressive and shows the stock trading at the highest level in ten years. The three biggest groups in the Materials SPDR (XLB) are chemicals (56%), mining & metals (27%), and paper & forest products (17%). Most of the recent leadership has come from the first two groups. It may be time for the paper stocks to start playing catch up.
Chart 6
Chart 7
S&P 500 IS BREAKING OUT ... Along with other blue chip averages, the S&P 500 is breaking through the top of its recent range. [Louisiana Pacific is its top percentage gainer]. Two things we'll be watching for today are a strong close and a pickup in trading volume. It does appear right now, however, that the market is moving to higher ground. The big question now is how much higher and for how long. I'll take a look at that later in the day.
Chart 8
