UPSIDE BREAKOUT IN BOND YIELDS RATTLES MARKET -- RATE SENSITIVE STOCKS LEAD DECLINE -- EVEN ENERGY WEAKENS
TEN-YEAR T-NOTE YIELD BREAKS THROUGH DECEMBER HIGH ... With all of the leading indicators of inflation pointing upward, it was just a matter of time before long-term rates started to rise as well. They did it today in a big way. Chart 1 shows the ten-year T-note yield breaking through its December high near 4.40% for the first time since last August. When yields rise, prices fall. That's what Chart 2 shows with the 7-10 Year T Bond ETF (IEF) falling below its December low. Chart 2 is a mirror image of Chart 1. That's obviously bad news for the bond market. It was also bad news for the stock market, and rate-sensitive stocks in particular. REITs were the hardest hit and lost over 3%. Financials also fared poorly. [Please see my two earlier postings on the relative weakness in those two groups]. That spilled over to the rest of the stock market. Even energy stocks caved in the afternoon. That was one of the few pockets of strength in the market. By day's end, just about everything was falling.
Chart 1
Chart 2
REITS ARE THE HARDEST HIT... Anything related to housing and real estate is especially rate sensitive. Historically low rates have kept the housing boom going much longer than most of us thought it would. With long-term rates now on the rise, this sector of the market has become especially vulnerable. The Cohen & Steers Realty iShares (ICF) were the weakest ETF of the day. Its daily chart shows it tumbling under its 50-day average on heavy volume. Notice all of the big red volume bars since the start of the year. That's heavy selling. It looks like the REIT market has peaked both on an absolute and relative basis. So have financial stocks. Even energy stocks fell today on heavy volume.
Chart 3
EVEN ENERGY WEAKENS... There wasn't much to hold the market up today. Although rising energy stocks (supported by rising crude oil) has been part of the market's problem, at least a strong energy sector provided some support to the market averages. Not today. Chart 4 shows the Energy Sector SPDR (XLE) falling on very heavy volume. Its 9-day RSI line has fallen under 70 for the first time in more than a month. That's a sign of a short-term top. The XLE is a long ways from its 50-day moving average which leaves plenty of room for a correction. Chart 5 shows the Oil Service Holders (OIH) having an equally bad day. The reason for that is easier to see in Chart 6. The monthly bars show that the OIH is up against its 2000 high near 100. That's a logical spot to see some profit-taking. Today's energy selling might be hinting that oil is going to have a tougher time getting through its October high near $55 -- at least for a while. The upside breakout in long-term rates, however, overshadowed a late pullback in crude oil and was the main reason for today's market selloff.
Chart 4
Chart 5
Chart 6
S&P 500 FALLS BELOW BREAKOUT POINT ON HEAVY VOLUME ... I complained yesterday about the lack of volume on last week's upside breakout by the S&P 500. We got much heavier volume today. But it was to the downside. That's not a good sign. Neither is the fact that the S&P 500 SPDR (SPY) closed back below its late-December peak at 121.76. Then we have the 9-day RSI and the 14-day stochastic oscillators failing to confirm the recent upside price breakout and starting to turn down from overbought territory. We have to also remember where today's pullback is coming from. We're in the fifth wave of a fifth wave advance. As I explained as recently as last Friday, I believe that the rally that started in early February is the fifth and final upwave in the cyclical bull market that started in October 2002. That's reason to be especially cautious about any hint of a market top. Another is the fact that this week marks the second anniversary of the start of the major advance that started in March 2003. I recently gave an upside target in the S&P 500 in the 1245-1250 zone by April. Monday's intra-day high came within 1.4% of that target. And April is only a month away. Close enough, in my opinion, to take some defensive action if the market averages continue to weaken. Any close below the late February low at 118.58 would raise the odds that the fifth and final upwave has been completed.
Chart 7
OFF TO CINCINNATI ... I'll be traveling to Cincinnati tomorrow (Thursday) to address the Cincinnati chapter of the Market Technicians Association. I hope to see some of you there. I should be back on Friday in time to do a weekend wrap up. In the meantime, don't pay too much attention to what you read in the paper or hear on TV. Keep your eyes on the charts. And believe what you see, not what you hear.
