THE FED FINALLY ADMITS THERE'S INFLATION -- SURGING BOND YIELDS PUNISH STOCKS -- RATE-SENSITIVE STOCKS FALL THE HARDEST
BOND YIELDS SURGE TO EIGHT-MONTH HIGH ... It's amazing to me how the media (and investors) hang on every word from the Fed. Veteran market watchers know that the Fed reacts to market events -- it doesn't anticipate them. Today's admission by the Fed that inflation pressures are growing seems to be a statement of the obvious. Yet the markets reacted like the Fed's statement was a new revelation. The Fed has always been a lagging indicator of economic events. Fortunately, we follow leading indicators which are the financial markets. And they've been saying for months what the Fed finally admitted today. Yet some were still surprised in both the bond and stock markets. Chart 1 shows the 10-year T-Note yield surging over 4.60% today for the first time in eight months. The TNX actually broke out to the upside two weeks ago. When yields rise, bond prices fall. That explains why the 7-10 Year T-bond ETF (Chart 2) tumbled to an eight-month low. The recent breakdown in rate-sensitive financials and REITs warned that was coming. They also led today's market fall.
Chart 1
Chart 2
FINANCIALS AND REITS TUMBLE ... Rate-sensitive stocks were the hardest hit today in the face of rising long-term rates. The fact is they've been dropping for weeks -- both on an absolute and relative basis. The Financials Sector SPDR (Chart 3) broke its 200-day moving average last Friday. Its relative strength line has been falling since mid-February. REITs also peaked at the end of last year and have been doing poorly since then. Chart 4 shows the Cohen & Steers Realty iShares falling hard again today. It was one of the day's worst performers. Its relative strength line peaked in December. When rate-sensitive stocks fall, that's usually a symptom of rising long-rates and a peaking stock market. The high-flying utilities also saw some selling today. Chart 5 shows the Utilities Sector SPDR falling to its 50-day average on heavy volume. The utilities have been market leaders.
Chart 3
Chart 4
Chart 5
S&P SPDR FALLS ON HEAVY VOLUME -- QQQQ BREAKS 200-DAY LINE ... There was nothing good to say about the market today -- unless you happen to be a short seller. The S&P SPDR fell to another two month low on rising volume. That's a bad combination. As I recently suggested, it's headed for an important test of its late-January low at 115.91. The Nasdaq 100 fared even worse. The QQQQ closed under its 200-day moving average. About the only thing that bounced today was the dollar on the hopes of higher U.S. interest rates. That caused more profit-taking in gold and gold shares. Crude oil fell more than a dollar. Even that didn't help the market. What we're witnessing is a textbook example of how a market peaks -- and why. If you haven't already done so, please read the message I posted earlier today about why rising long-term rates are a threat to the stock market which is already in a weak technical condition (March 22, 2005). It should help put today's events in perspective. Even though the Fed has been behind the curve, we haven't. Nor have you.
Chart 6
Chart 7
