TREASURY BOND ETFS HOLD BREAKOUTS AFTER GDP REPORT -- 30 YEAR YIELD REMAINS BELOW 3% -- RELATIVE STRENGTH IN TREASURIES COULD BE NEGATIVE FOR STOCKS -- COULD BLOW-OFF TOPS BE TAKING SHAPE IN XLP AND XLV?
TREASURY BOND ETFS HOLD BREAKOUTS AFTER GDP REPORT ... Link for todays video. Either the relationship between stocks and Treasuries is changing or something needs to give. Stocks and Treasuries have shown a rather strong negative correlation since late 2010. This negative correlation is being challenged in April. The S&P 500 is up around 1% this month and close to an all time high. The 20+ Year T-Bond ETF (TLT) is up almost 5% in April and sporting a fresh breakout. Chart 1 shows TLT with a falling wedge from July to March. This declined supported the rally in stocks as money rotated out of Treasuries. This rotation may be changing as TLT surged above falling wedge resistance at the beginning of the month. This, of course, was in reaction to the weak non-farm payroll report. TLT moved higher again this week as durable good orders fell and GDP disappointed. This means the breakout is holding and remains bullish until proven otherwise. I would reassess this breakout if TLT moves back below 120. Treasuries will be on the hot seat next week because the employment report is scheduled for next Friday. Chart 2 shows the 7-10 year T-Bond ETF (IEF) breaking above its 2012 high with a small advance this week. This breakout is potentially negative for stocks as long as it holds. The indicator window shows MACD moving further into positive territory.
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Chart 1
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Chart 2
30-YEAR YIELD REMAINS BELOW 3%... I always check the 10-year Treasury Yield ($TNX) and 30-year Treasury Yield ($TYX) to confirm what I am seeing on the ETFs above. $TNX and $TYX are closer to the actual Treasury bond market than the ETFs. Why? First, the ETFs are made up of several Treasury bonds, which means they have an average maturity. The average maturity for TLT is 27.64 years, while the average maturity for IEF is 8.33 years. Second, there are management fees and other small holdings in the ETFs. Third, $TNX and $TYX are simply mirror images of their respective Treasury bonds. They are as close to the Treasury bond price as we can get. Chart 3 shows the 30-year Treasury Yield breaking wedge support and holding this break. A move above 30.2 (3.02%) is needed to negative this break. Chart 4 shows the 10-year Treasury Yield ($TNX) holding its break with first resistance marked at 18 (1.8%).
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Chart 3
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Chart 4
RELATIVE STRENGTH IN TREASURIES COULD BE NEGATIVE FOR STOCKS... As noted above, stocks have held up quite well this month considering the surge in Treasuries. Stocks, however, still look vulnerable because they are starting to underperform. Chart 5 shows the SPY:TLT ratio, which measures the performance of SPY relative to TLT. This ratio plot is quite jagged so I applied MACD(12,26,1) in the indicator window. Setting the signal line to 1 essentially removes it so we can focus on the MACD line. Momentum for the SPY:TLT is bullish when MACD is positive and this is positive for stocks. Conversely, momentum is bearish when MACD is negative and this is negative for stocks. The green and red lines show crosses above and below zero. Stocks generally perform well when MACD is positive and perform poorly when MACD is negative. MACD turned negative at the beginning of the month and this suggest that SPY is starting to underperform TLT. Put another way, TLT is starting to outperform SPY or Treasuries are starting to outperform stocks. This is potentially negative for stocks. Chart 6 shows the SPY:IEF ratio with the red and green lines marking more subjective trend changes.
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Chart 5
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Chart 6
COULD BLOW-OFF TOPS BE TAKING SHAPE IN XLP AND XLV?... The Consumer Staples SPDR (XLP) has been on a tear in 2013 with a 17+ percent advance year-to-date. Chartists do not need a momentum oscillator to understand that this ETF is overextended and ripe for a pullback. The indicator window in chart 7 shows the 4-period rate-of-change moving to its highest level in ten years. The month still has a few days left for trading so this value may change. There is a big difference between the 2009 rate-of-change surge and the 2013 surge. Most notably, the 2009 rate-of-change surge occurred after a deep dip and signaled the start of a multi-year advance. It was a momentum thrust similar to a rocket blast off. The current momentum surge is occurring after a four year advance. The trend is clearly up, but a huge momentum surge in a mature uptrend smacks of a blow-off top, which is the opposite of a selling climax. Notice that April volume is the highest since October 2011. High volume is also part of the blow-off top. Predicting the actual reversal is difficult, but the odds clearly favor a pullback or correction in XLP. Broken resistance and the 2010 trend line mark first support in the 35-36 area. Chart 8 shows the Healthcare SPDR (XLV) with a 19+ percent surge in the last four months and the highest monthly volume since November 2011.
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Chart 7
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Chart 8
AMGEN, MERCK AND PROCTER LEAD POST-EARNINGS RETREAT... Buy on rumor and sell on news is a Wall Street saying that most of us are familiar. It means traders/investors buy on the prospects of good news and then sell when these prospects become reality. There was certainly a big run up in stocks as earnings season approached. This run meant that many stocks were priced for perfection or had already priced in good news. Either way, it was a recipe for a pullback or correction. Over the last few days, a number of consumer staples and healthcare stocks were hit hard after their earnings reports. In fact, some of the recent leaders in these sectors fell sharply over the last few days. Chart 9 shows Amgen (AMGN), a biotech and healthcare leader, surging over 35% from the January low to the April high. The stock fell back with a gap down on Wednesday. Chart 10 shows Merck (MRK) advancing around 20% from mid February to late April and the falling sharply over the last two days. Chart 11 shows Procter & Gamble (PG) advancing over 20% and then falling after its earnings report missed expectations. The stock gapped down on Wednesday with high volume and continued lower on Thursday. PG is, however, near its first support zone around 75-76 and could be ripe for a short-term bounce.
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Chart 9
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Chart 10
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Chart 11
IYZ SHOWS BENEFIT OF ETFS OVER INDIVIDUAL STOCKS... ETFs offer traders and investors exposure to specific market themes and also insulate them from company specific events. The Telecom iShares (IYZ) is a case-in-point this week. Chartists wanting exposure to wireless can analyze the big carriers and make an educated guess on which one will perform the best. Buying one stock means exposure to any company-specific surprises. Chart 12 shows AT&T (T) surging from mid January to late April and then gapping down after a disappointment this week. The gap held as the stock broke the January trend line on high volume. At 9.17%, AT&T is the single biggest holding in the Telecom iShares. Despite such a large influence, chart 13 shows IYZ taking a small hit on Wednesday and then moving to new highs on Thursday. The issues with AT&T were clearly company specific as the other components in the ETF gained ground. In particular, chart 14 shows Verizon (VZ) dipping in mid March, but recovering immediately and moving to new highs. Like many defensive names, VZ is overextended on the upside and ripe for a correction.
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Chart 12
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Chart 13
