FINANCIAL STOCKS LEAD MARKET DECLINE -- SO DO UTILITIES -- RISING RATES ARE PART OF THE PROBLEM -- S&P 500 CLOSES BELOW 50-DAY AVERAGE ON HEAVY VOLUME

SUBPRIME CONCERNS HURT BANKS AND BROKERS ... Growing concerns about the fallout in the subprime mortgage market caused heavy selling in banks and brokers today. Today's selling more than wiped out yesterday's rebound in the financial group. Chart 1 shows the Financials Sector SPDR (XLF) undercutting yesterday's intra-day low. It's now threatening its 200-day moving average. Most of the selling came in brokers and money center banks most directly affected by subprime problems.

Chart 1

FIRST THE BANKS ... Two of the biggest bank losers were Citigroup (-2.50%) and JP Morgan (-2.47%). Chart 2 shows Citigroup closing well below its 50-day moving average. Today's selling also came on heavier volume. Chart 3 shows JP Morgan threatening its 200-day moving average. That long-term support line hasn't been broken in more than eighteen months.

Chart 2

Chart 3

BEAR STEARNS AND MERRILL TAKE A BIG HIT ... Brokerage stocks had a very bad day as well. Most of the attention was centered around Bear Stearns which plans to buy as much as three billion of loans to prevent a collapse in one of its hedge funds. BSC has the weakest chart pattern of the brokerage stocks. Chart 4 shows the stock falling today on very heavy volume and trading dangerously close to its March low. Merrill Lynch lost 3% (also on heavy volume) and undercut its 200-day moving average (Chart 4). One factor that stands out in all of the financial stocks (in addition to their deteriorating chart patterns) is their relative weakness since the start of the new year. I suspect that also has something to do with the threat of rising global bond yields. That view is supported by relative weakness in other rate-sensitive groups like homebuilders, REITS, and utilities.

Chart 4

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UTILITIES CONTINUE TO DROP ... Rate-sensitive utilities suffered the day's biggest percentage loss. Today's 1.75% loss puts the Dow Utilities in danger of dropping down to its 200-day average. Its falling relative strength ratio (bottom of Chart 6) shows underperformance since the start of May. Chart 7 shows why. That chart overlays the UTIL/SPX ratio (red line) with the 10-Year T-Note Yield (green line) since last December. Chart 7 shows that the May downturn in utility performance coincided with an upward spike in bond yields. Chart 8 does the same comparison with financial stocks. It overlays the 10-Year Yield (green line) on the XLF/SPX ratio. Chart 8 shows that the downturn in the relative performance of financial stocks coincided with the upturn in bond yields in late February/early March (see arrows). There seems little doubt that rising bond yields are starting to have a negative impact on rate-sensitive stocks groups.

Chart 6

Chart 7

Chart 8

S&P 500 CLOSES BELOW 50-DAY AVERAGE ... The market ended the week on a bad note. Chart 9 shows the S&P 500 closing below its 50-day moving average for the first time in nearly three months. And it did so on unusually heavy volume. That could set the stage for a retest of the early June intra-day low at 1487. I commented yesterday on the lack of upside momentum shown on the 12-day Rate of Change (ROC) indicator (top of Chart 9). The inability of the ROC to rise back over its zero line provided some hint that the recent rebound was on weak footing. As some of you have correctly pointed out, our short-term momentum indicators have also been weakening of late. The real test will come next week as major market indexes test their June lows. Closes below those lows would trigger short-term sell signals.

Chart 9