DROP IN BOND YIELDS BOOSTS RATE-SENSITIVE STOCKS LIKE UTILITIES AND REITS -- OVERSOLD FINANCIALS ARE REBOUNDING

BOND YIELDS CONTINUE TO DROP ... Two things happened today that help explain the continuing drop in bond yields -- and another jump in bond prices. One is the plunge in crude oil futures, which is anti-inflationary. Another is the big drop in durable goods orders, which is more evidence of a slowing economy. That's usually better for bonds than it is for stocks. Chart 1 shows the 10-year T-note yield falling again today (and trading under its 200-day moving average). Chart 2 shows the 20-Year T-Bond ETF (TLT) climbing closer to its February high. Rising bond prices have also gotten a boost from money moving out of the stock market. Rising bond prices (and falling yields) are giving a boost to rate-sensitive stock groups like utilities and REITs and even financial stocks.

Chart 1

Chart 2

UTILITIES ARE TOP GROUP FOR 2005 ... Outside of energy, utilities are the top sector for 2005 (see "John's Latest Performance Chart" posted on Monday, April 25). [The two other 2005 leaders are Healthcare and Consumer Staples]. Chart 3 shows the Utilities Select SPDR (XLU) bouncing nicely off its 50-day moving average. Its relative strength line continues to climb in uninterrupted fashion. Utilities are both rate-sensitive and defensive. And they pay nice dividends. A good place to be in a nervous stock market with falling interest rates. REITs are also doing much better.

Chart 3

REITS ARE ATTRACTING NEW MONEY ... Back on April 19, I wrote about how falling bond yields were starting to push some money back into the REIT market. Since then, their chart picture has gotten even stronger. Chart 4 shows the Cohen & Steers Realty Major iShares (ICF) breaking through a four-month down trendline after a successful challenge of their 200-day moving average in late March. Their relative strength line has also turned up. REITs have a low correlation to the rest of the market, benefit from falling rates, and pay high dividends. Financial stocks are also bouncing today.

Chart 4

FINANCIALS ARE BOUNCING... Rate-sensitive financial stocks are also bouncing today. The chart of the Financials Sector SPDR (XLF) shows the ETF still well below its moving average lines. But its relative strength line has reached the highest level in a month. It appears that some money moving out of the inflationary gold and energy stocks is starting to nibble on oversold financial stocks.

Chart 5