STRONG JOB NUMBERS PUSH BOND YIELDS HIGHER AND STOCKS LOWER -- RATE-SENSITIVE BANKS AND REITS SELLOFF -- WEAK WAL MART WEIGHS ON RETAILERS -- GASOLINE BOUNCES OFF CHART SUPPORT -- A BUY SIGNAL IN GOLD
BOND YIELDS JUMP SHARPLY ... Unexpectedly strong job figures caught the bond market by surprise today and pushed bond yields sharply higher. The latest unemployment number fell to a five year low and payroll numbers for August and September were revised sharply higher. In addition, wages rose more than expected. Rising wages are potentially inflationary, while the strong jobs data reduces the chances for Fed easing. There may also be a technical explanation for higher yields today. Chart 1 shows that the 10-year T-note yield (TNX) is bouncing off potential chart support near its October low. That's not enough to reverse its downtrend, however. To do that, the TNX needs to exceed its October high and its 200-day moving average. The surge in yields, however, caused selling in rate-sensitive market groups -- including banks, brokers, homebuilders, and REITS. Banks and REITs suffered the worst short-term chart damage.
Chart 1
BANK INDEX BREAKS 50-DAY LINE ... Chart 2 shows some deterioration in bank stocks. The PHLX Bank Index is slipping below its 50-day moving average which is the first caution sign. Another is the slide in the group's relative strength ratio. After rising from February to August, the BKX:SPX ratio has broken its uptrend line and has fallen to the lowest level in six months. REITs are also coming under new selling pressure.
Chart 2
REITS SELLOFF ON HEAVY VOLUME ... Up until this week, REITs (Real Estate Investment Trusts) have been a pillar of stability and leadership. Starting yesterday, however, the group has fallen sharply and has been one of the market's weakest performers. Chart 3 shows the Dow Jones Real Estate iShares (IYR) threatening their 50-day line. Even worse is the big jump in trading volume as prices have fallen on Thursday and Friday. The group's relative strength line is also showing early signs of rolling over. Another group experiencing Friday selling is the Consumer Discretionary sector and retailers in particular. While that group is also rate-senstive, it may also be reacting negatively to a big jump in energy shares and rebounding oil market.
Chart 3
WAL-MART SELLING WEIGHS ON RETAILERS ... Retail stocks, which had started to show some relative strength during August, came under heavy selling at week's end. Not too long ago I showed the Retail Holders (RTH) breaking through their 2005 highs to register an upside breakout (Chart 4). This week's selling on rising volume, however, has put that breakout in jeopardy. The group's relative strength line has also started to slip. A lot of the damage came from Wal Mart. Disappointing numbers at mid-week (and a negative forecast for the holidays) pushed the big retailer back below its 50-day average (Chart 7). That selling has also negated the recent upside breakout above the 50 level. Retail selling has to be disappointing to the stock market which was betting on consumer spending to keep things going. This week's energy rebound isn't helping the retailers or the market.
Chart 4
Chart 5
GASOLINE BOUNCES FROM CHART SUPPORT ... A lot of the retail (and market) buying since August was fueled by falling energy prices. Unfortunately, that window of opportunity may be closing. Chart 6 shows unleaded gasoline starting to bounce off potential chart support along the lows of the last year. Gasoline is leading a bounce in the energy pits at week's end (oil rallied more than a dollar on Friday). With the stock market on the defensive, energy stocks were the day's biggest winners.
Chart 6
ENERGY STOCKS ARE BOUNCING AGAIN ... The last time I showed the Energy Sector SPDR (XLE) it was starting to bounce off chart support along its 2006 lows (see circles). Chart 9 shows that the XLE has climbed back over its moving average lines and may be heading toward the top of its 2006 trading range. Its relative strength ratio is starting to bounce as well. Oil Service stocks have been the weakest part of the energy patch. Chart 10 shows the Oil Service Holders (OIH) having broken their June/October downtrend line. I've suggested before that buying in energy stocks usually leads to buying in the commodities themselves. Rising bond yields on Friday gave a boost to the dollar. In an impressive show of strength, gold continued its recent climb.
Chart 7
Chart 8
GOLD ETF IS ON P&F BUY SIGNAL ... I started the week by writing about gold stocks leading the precious metals higher and why that was bullish for both. Since then, the StreetTracks Gold Trust Shares (GLD) has broken through chart resistance at 60, is back over its moving averages, and has broken a six-month down trendline (Chart 9). Chart 10 is point & figure chart of the GLD. It shows the last x column exceeding the previous x column at 60 which represents a buy signal for the gold ETF.
Chart 9
Chart 10
NASDAQ GIVES P&F SELL SIGNAL... Since I wrote about point & figure charts earlier in the week, I thought I'd end with a couple of p&f charts. Chart 11 is the more sensitive Dow chart that I plotted on Wednesday (each box worth 25 Dow points). Although the Dow has suffered the biggest downturn since August (7 boxes), it hasn't given an actual p&f sell signal yet. It would have to drop to 11925 to do that. [The less sensitive version (50 point boxes) did, however, suffer a three-box downside reversal which justifies some profit-taking). The Nasdaq suffered more more serious damage. The p&f boxes in Chart 12 show the Nasdaq Composite Index falling below previous support at 2330. That's the first p&f sell signal since the Nasdaq uptrend began at 2100 during August.
Chart 11
Chart 12
