FALLING DOLLAR BOOSTS GOLD AND MATERIAL STOCKS -- STEEL CONTINUES TO LEAD -- LEADERS INCLUDE NUCOR AND STEEL DYNAMICS -- TELECOM ISHARES HIT NEW HIGH LED BY VERIZON, CROWN CASTLE, AND SBA COMMUNICATIONS -- DIVIDEND ISHARES ALSO HIT RECORD HIGH
U.S. DOLLAR INDEX FALLS TO TWO-YEAR LOW... The U.S. dollar continues to weaken. Chart 1 shows the PowerShares US Dollar Bullish Fund (UUP) falling to the lowest level since the third quarter of 2011. One of the side-effects of a falling dollar is that it gives a boost to gold. And it's doing just that. Chart 2 shows the SPDR Gold Trust (GLD) gapping 3% higher today. In so doing, it is rising above a falling trendline drawn drawn over its August/September peaks. The 14-day RSI line (top of chart) is about to rise above 50 for the first time in two months. And the daily MACD lines (bottom of chart) appear poised to turn positive for the first time since August. Gold stocks are also rallying today along with other stocks tied to commodity prices.
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Chart 1
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Chart 2
FALLING DOLLAR BOOSTS MATERIAL STOCKS ... The strongest sector in today's trading is basic materials. Chart 3 shows the Materials SPDR (XLB) approaching a new record high. The stronger relative performance of those stocks didn't start today. In fact, it's been helping lead the market higher for the last three months. The XLB/SPX ratio (bottom of chart) bottomed during July and has been rising since then. It's no coincidence that the stronger relative performance of stocks tied to commodities has coincided with a falling dollar over those same three months.
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Chart 3
STEEL STOCKS ARE LEADING... One of the strongest groups in the material space is steel. Chart 4 shows the Market Vectors Steel ETF (SLX) trading at a new eight-month high after having risen above a falling trendline extending back to the start of 2012 (green circle). The stronger performance by steel also started during July when the dollar peaked. Some steel leaders are doing even better. The weekly bars in Chart 5 show Nucor (NUE) having recently hit a new five-year high. Its relative strength ratio (gray area) has been rising as well. Chart 6 shows Steel Dynamics (STLD) trading at a two-year high. Its relative strength ratio (gray area) is also rising.
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Chart 4
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Chart 5
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Chart 6
TELECOM ISHARES HIT NEW HIGH ... The recent drop in bond yields is giving a boost to interest-sensitive stocks. Telecom shares are among the strongest in that group. Chart 7 shows Telecom iShares (IYZ) breaking through its July peak to reach a new five-year high. The IYZ/SPX ratio (below chart) has been rising since mid-September. That's roughly when bond yields starting to slip again. The jump in the 10-Year T-Note yield (green line) during May and August hurt the relative performance of telecom stocks (which are big dividend payers). The recent drop in bond yields may be one reason why telecom is becoming a market leader.
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Chart 7
TELECOM LEADERS ... Three of the top telecom stocks are shown below. Chart 8 shows Verizon Communications (VZ) gapping more than 3% higher to hit a new two-month high. It is now back above both moving average lines. Chart 9 shows Crown Castle (CCI) also surging today. It has broken a falling trendline drawn over its May/July highs. Chart 10 shows the strongest of the three -- SBA Communications (SBAC) -- breaking out to a new record high. All three stocks peaked during May when bond yields started to climb. Falling bond yields may now be giving them an added boost. Falling bond yields may also explain why the U.S. dollar is dropping (and gold is rising).
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Chart 8
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Chart 9
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Chart 10
RISING BOND PRICES GIVE DIVIDEND ISHARES AND UTILITIES A BOOST... Telecom isn't the only dividend paying group rising today. Chart 11 shows DJ Dividend iShares (DVY) also hitting a new record. The DVY/SPX ratio (below chart) peaked during May (when bond yields started rising) has been rising over the last month (as bond yields have dropped). Falling bond yields increase the appeal of dividend-paying stocks. It just so happens that the biggest group in the DVY -- utililities -- is one of today's top gainers. Chart 12 shows the Utilities SPDR (XLU) climbing nicely today after bouncing off its (red) 200-day moving average. That's largely due to the drop in bond yields and the recent rise in bond prices. Notice the close correlation between the XLU and the price of the 7-10 Year Treasury Bond Fund (IEF) since May (green line). Other rate-sensitive groups that stand to benefit from a rally in bonds (and a drop in yields) are homebuilders and REITS. A rise in rate-sensitive stocks is also positive for the market as a whole. With the stalemate in Washington over for now, a move to new highs by major stock indexes now appears likely. Foreign stocks are also benefiting from a weaker dollar. A stronger Euro is giving a boost to European shares.
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Chart 11
