SMALL CAP INDEX HITS NEW HIGH -- S&P 500 CLEARS 50-DAY AVERAGE -- EUROPEAN DECISION TO LEAVE RATES UNCHANGED CAUSES POUND AND EURO TO TUMBLE AND PUSHES DOLLAR SHARPLY HIGHER -- WTI CRUDE HITS 14-MONTH HIGH AND IS CATCHING UP TO BRENT
S&P 500 CLEARS 50-DAY LINE... Tuesday's message showed small caps leading large cap stocks higher. That's still the case. Chart 1 shows the S&P 600 Small Cap Index ($SML) having cleared a resistance line drawn over its May/June highs and, more importantly, closing above its May high. Chart 2 shows the S&P 500 Large Cap Index ($SPX) having cleared its 50-day average for the first time in two weeks. It still needs to clear its two-month resistance line, but today's action was encouraging. The Dow Industrial and Nasdaq 100 indexes also cleared their 50-day lines. The bottom of Chart 2 shows the VIX Index falling below its mid-June low, which is good for stocks. Volume picked up from Wednesday's abbreviated session, but was on the light side (which is to be expected on a post-holiday Friday). Today's stock rally followed strong action in foreign stocks yesterday (as our markets were closed for the Fourth of July), and a good jobs report this morning. Today's biggest sector gainers were in economically-sensitive stock groups like autos and banks. Energy stocks also benefitted from an upside breakout in oil (more on that shortly). European decisions yesterday to keep rates low caused sharp drops in their currencies, especially the British Pound.
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Chart 1
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Chart 2
EURO CURRENCIES PLUNGE BOOSTS DOLLAR... Yesterday's announced intentions by the British and European central bankers to keep rates down gave a big boost to European stocks, but hurt their currencies. The biggest loser was the British Pound. Chart 3 shows the pound tumbling 2.5% today to the lowest level since March. Chart 4 shows the Euro gapping down 1.3% to its May low. Other European currencies also fell. [The yen also dropped which boosted Japanese stocks]. The U.S. Dollar Index gapped sharply higher today, as shown in Chart 5. The surging dollar pushed gold and silver prices sharply lower, along with most other commodities. The big exception was oil.
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Chart 3
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Chart 4
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Chart 5
WTI CRUDE IS CATCHING UP TO BRENT... The price of West Texas Intermediate Crude oil (the U.S. benchmark) has exploded over the last week. The lower line in Chart 6 shows the August light crude oil contract having broken out to the highest level in 14 months. Today's rise puts August crude at 103.12, which is $4.34 below the price of European brent crude (which ended at 107.46). Both varieties of crude usually trade around the same price. U.S. crude has been much weaker than brent over the last two years, owing to supply bottlenecks in the the U.S. With those having been relieved, the U.S. oil market is catching up to Europe. The upper line in Chart 7 shows the August Brent Crude contract trading at a three-month high today. Energy traders are betting that WTI crude will catch up to the price of brent and close the unusual gap between the two.
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Chart 6
FORD LEADS AUTOS HIGHER... Automobile stocks helped lead the market higher today, as they've been doing all year. Chart 7 shows the Dow Jones Automobile Index testing a resistance line drawn over its 2007/2011 highs. The group's relative strength ratio (solid line) has been rising all year. Ford Motor was today's standout performer. Chart 8 shows today's 1.6% gain putting the auto leader at the highest level since early 2011. Its rising relative strength ratio (dashed line) shows it to be a market leader. Autos aren't the only economically-sensitive group that's doing well. So are banks.
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Chart 7
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Chart 8
BANK INDEX REACHES HIGHEST LEVEL IN FOUR YEARS ... Bank stocks are also leading the market higher. The weekly bars in Chart 9 show the PHLX Bank Index (BKX) trading at the highest level since 2008. The BKX recently achieved a major bullish breakout by exceeding its early 2010 high. After consolidating along its breakout point (see circle), it has resumed its new uptrend. The rising BKX/SPX ratio (dashed line) has reached the highest level in two years. It's normally a good sign when bank stocks are leading the market higher, as they're doing today. I recently wrote a message explaining that rising bond yields (and a steeper yield curve) were helping bank profits, since banks can make loans at higher interest rates (while paying depositors close to nothing). Today's bank gains might have gotten a boost from another jump in bond yields.
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Chart 9
TREASURY BOND YIELDS REACHES TWO-YEAR HIGH ... The weekly bars in Chart 10 show the 10-Year Treasury Note Yield (TNX) climbing to 2.71% which is the highest yield since the summer of 2011. Bond prices fell sharply as a result. It's comforting to see stock prices advancing in the face of rising yields, especially economically-sensitive stock groups. That suggests that investors are beginning to believe that rising bond yields imply economic strength. I also believe that money coming out of a falling bond market is finding its way into stocks.
