GLOBAL STOCKS AND COMMODITIES BOUNCE OFF 50-DAY LINES -- BONDS, HOWEVER, REMAIN UNDER PRESSURE -- MUNIS HAVE BEEN HIT ESPECIALLY HARD AND SHOW THAT BONDS CAN LOSE MONEY -- FINANCIAL SPDR SUFFERS A MINOR SETBACK IN BOTTOMING FORMATION
MUNIS TUMBLE... We've been showing the upward trend in bond yields since the Fed's latest QE2 package was announced last week. We've also shown the drop in bond prices, especially Treasury bonds and notes. The bond category that's been hit the hardest has been tax-exempt municipal bonds. The first two charts show just how bad they've been hit. Chart 1 shows the S&P National Municipal Bond ETF (MUB) tumbling to a new 2010 low over the last month. It has also broken its 200-day moving average for the first time in two years. Mutual fund bond investors haven't escaped the price plunge. Chart 2 shows the Fidelity Municipal Income Fund (FHIGX) breaking its 200-day line as well (other muni bond funds look pretty much the same). The only bright spot lies in the deeply oversold conditions of both funds. That suggests that the muni bond market may be due for a bounce. But there's a bigger message (and warning) involved in the two charts. A lot of investors have poured money into the fixed income market over the last year in a search for yield (at the expense of stocks). Part of the preference for fixed income has also been a desire for safety. While it's true that bonds are generally safer than stocks, it is possible to lose money in bonds. When bond yields rise, prices fall. If you have money in a bond mutual fund, it will lose money when long-term rates are rising (as they're doing now). Yes, you'll get a higher yield. But the benefits of a higher yield will be more than offset by falling prices. Your mutual fund statement is based on price, not yield. The sharp drop in the Fidelity muni bond fund in Chart 2 shows that bond funds aren't always safe.
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Chart 1
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Chart 2
RISNG BOND YIELDS HINT AT STRONGER ECONOMY ... The risk factor for bonds increases in a strengthening economy. That's because yields tend to rise when the economy is rebounding. In fact, rising bond yields are one of the signs of a stronger economy. The latest report on leading economic indicators rose for the fourth month in a row which hints at economic growth in the months ahead. The strongest LEI indicator is a steepening yield curve which is being caused by the jump in long-term yields. Chart 3 shows the 30-Year T-Bond yield (TYX) bottoming during August and since climbing back above its 200-day average (red line). Rising bond yields are usually associated with a stronger economy and a rising stock market. If you compare the two lines in Chart 3, you'll see that bond yields (price bars) and stocks (green line) have tended to rise and fall together. Right now, both are rising. Not surprisingly, the second strongest LEI indicator after rising bond yields is rising stock prices. While that's good for stocks, it's bad for bonds.
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Chart 3
DOW HOLDS 50-DAY LINE ... On Tuesday, I wrote about a test of initial support at the 50-day moving average and the lower Bollinger band. Charts 4 and 5 show the Dow Industrials bouncing off both lines in today's trading (as are several other stock indexes). That's an encouraging sign. In fact, today's price action around the globe is almost a mirror image of the price drop on Tuesday. With the Euro stabilizing, global stocks and commodities are rising today and are bouncing off (or regaining) their 50-day lines. Chart 6 shows the DB Commodities Tracking Index (DBC) back over its 50-day line and its October low. Chart 7 shows the same for Emerging Market iShares (EEM). Bonds are the only losers. Chart 8 shows the 7-10 Year T-Bond ETF (IEF) trading decisively below its 50-day line. If bond prices continue to weaken, that will present an interesting dilemma for bond holders. If they hold on, they risk more losses. If they sell, where do they put the money? Money market funds pay little or no interest. It seems likely that at least some bond money will be forced into stocks (or commodities). I think that's what the Fed is hoping for.
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Chart 4
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Chart 5
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Chart 6
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Chart 7
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Chart 8
BROKERS MAINTAIN UPTREND... Chart 9 shows the Financials Sector SPDR having slipped below its breakout point at 16 at midweek. Fortunately, it managed to stabilize at its two moving average lines. Chart 10 shows Bank Regional Holders (RKH) slipping back below its 200-day line, but holding above its September highs. One of the more positive signs coming from the financial sector is the relatively strong action by brokers. Chart 11 shows the Broker-Dealer iShares (IAI) maintaining its new uptrend. Insurance stocks are rising as well (Chart 12). Despite this week's setback, I still believe the financial sector is bottoming.
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Chart 9
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Chart 10
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Chart 11
