TWENTY-ONE MONTH HIGH IN BOND YIELDS RATTLES MARKET -- ENERGY AND UTILITIES ARE DAY'S WEAKEST GROUPS ALONG WITH GOLD STOCKS --- TELECOM AND REITS ARE ONLY WINNERS -- S&P MAY TEST 2006 LOW

BOND BREAKOUT ... Last Friday I showed the yield on the 10-year T-note testing its 2004 highs. It broke through those highs today. Chart 1 shows the TNX trading over 4.70% for the first time since the middle of 2004 (see red circle). That appears to leave little doubt that bond yields have finally started to climb in a meaningful way. The next challenge will come at the early 2004 peak near 4.90%. The monthly bars in Chart 2 show how important that test will be. A decisive close over 4.90% would put the 10-year yield at the highest level in nearly four years. The rising trendline below the yield troughs greatly increases the odds that the 2004 peak will eventually be exceeded. Low bond yields have been one of the most supportive factors behind the housing industry, the economy, and the stock market. As I suggested last Friday, rising bond yields inject a new note of caution into the stock market. The surge in bond yields may also account for some of the selling in gold and energy shares today. Utilities were also hit hard.

Chart 1

Chart 2

ENERGY AND UTILITIES FALL TOGETHER ... These were the day's two weakest sectors. A sharp drop in energy prices caused heavy selling across the entire energy spectrum. That had a bearish influence on utility stocks tied to energy prices and natural gas in particular. Chart 3 shows the Energy Select SPDR (XLE) trading back under its 50-day average. Just below it, the Utilities Select SPDR (XLU) is bearing down on its 200-day line. Part of the selloff in utilities may also be tied to their sensitivity to long-term interest rates. Historically, rising bond yields have had a negative influence on utilities. Gold stocks also fell hard today.

Chart 3

Chart 4

GOLD FALLS WITH OTHER COMMODITIES ... Most commodities fell today as the CRB Index lost more than six points. Most commodity-related stocks fell as well. The Gold & Silver (XAU) Index, which broke its 50-day line last week, fell to a new 2006 low (Chart 5). The chart below it shows the Gold ETF (GLD) falling the equivalent of $10 on rising volume. Although bullion continues to hold up better than its stocks, it appears that both are now on the defensive. Gold selling (and a weaker yen) took a toll on Japanese iShares. The EWJ has fallen back below its 50-day average and may be headed for a retest of its 2006 lows (Chart 7). I suspect part of today's commodity selling is tied to the upside breakout in interest rates and its potential for economic slowing. Today's bounce in the dollar didn't help either. There wasn't much left to hold the market up. Outside of telecom and REITs.

Chart 5

Chart 6

Chart 7

TELECOM RALLIES... The news of a merger between AT&T and Bellsouth sparked buying in the telecom sector today. Although that grabbed a lot of the day's headlines, it's important to note that telecom has been on the rise since the start of the year. The weekly bars in Chart 8 show the Telecom Holders (TTH) having just broken through their 2004 highs. I've written several bullish stories on the group. I didn't see anything today to change my positive attitude toward the telecom group. [Wireless Holders (WMH) also hit a new multi-year high today]. Outside of telecom, REITs were the only other group to hold up today. Chart 9 shows the Realty iShares (ICF) reaching a new record high.

Chart 8

Chart 9

S&P 500 WEAKENS ... The S&P 500 lost nearly nine points today and is sitting right on its 50-day line. The 9-day RSI line, however, has slipped beneath 50 which suggests more weakness. The MACD histogram below the chart has turned slightly negative. That suggests that the short-term trend is weakening. The lower Bollinger band in Chart 10 sits right at the early February low near 1255. I suspect that's where the S&P is headed. The recent selloff raises the possibility of a "double top" forming in the S&P marked by the early January - late February peaks. For that bearish pattern to be confirmed, however, the S&P would have to break its February low. I wrote last Friday that a breakdown in bond prices usually precedes a breakdown in stock prices. Today's action suggests that rising bond yields have investors worried. I'd get a lot more worried if the S&P were to hit a new low for the year.

Chart 10