BOND PRICES CONTINUE TO BACK OFF FROM OVERHEAD RESISTANCE -- THAT'S EXERTING DOWNSIDE PRESSURE ON HOMEBUILDERS AND REITS -- UTILITIES ARE TESTING SUMMER HIGHS -- FALLING CRUDE OIL HAS GIVEN BIG LIFT TO AIRLINES
BOND FUND TURNS DOWN AT RESISTANCE ... My last message showed various overbought bond ETFs starting to weaken from overhead resistance. Since then, bond ETFs have fallen even further. Chart 1 shows the Barclays Aggregate Bond iShares (AGG) falling back below its 200-day moving average after failing a test of an overhead resistance line drawn under its first quarter lows (red arrow). [The AGG is the most commonly watched barometer of investment grade corporate and Treasury bonds]. In addition, the AGG had retraced 62% of its May/September plunge, which provided another overhead resistance barrier to deal with. It failed that test as well. Falling bond prices translate into rising bond yields. Certain stock market sectors are especially vulnerable to rising bond yields and falling bond prices. They too are struggling with overhead resistance barriers.
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Chart 1
HOMEBUILDERS AND REITS WEAKEN WITH BONDS... Homebuilders and REITs are very sensitive to interest rates. Falling rates help them, and rising rates hurt. Since they generally trend in the "opposite" direction of bond yields, they trend in the "same" direction as bond prices. Chart 2, for example, shows the close correlation bertween the Dow Jones Home Construction iShares (brown bars) and the Bond iShares (AGG) shown in Chart 1. Notice how closely they track each other. Rising bond prices since September have pushed the ITB up against chart resistance along its September peak. Falling bond prices this week have caused that test to fail (at least for now). Chart 3 shows a similar correlation between bond prices and the Dow Jones Wilshire REIT ETF (RWR). The RWR has fallen back below its 200-day average this week as bond prices have weakened.
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Chart 2
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Chart 3
DOW UTILITIES CHALLENGE SPRING HIGH... Utility stocks are the most rate-sensitive part of the Dow complex. And they're at a crucial chart juncture. Chart 4 shows the Dow Utilities challenging chart resistance along their summer highs. Rising bond yields are normally bad for utility stocks. So it will be doubly interesting to see if they're able to break through that chart resistance. Utilities aren't the only part of the Dow complex that are testing resistance levels. So are the Dow Industrials (more on that shortly) and some parts of the transportation group.
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Chart 4
FALLING OIL PRICES HELPS AIRLINES TAKE OFF... The Dow Jones Tranportation Average has been trading in record territory. Most of that strength, however, has come in the airline group (and, to a lesser extent, air freight). The black bars in Chart 5 show the Dow Jones U.S. Airline Index ($DJUSAR) surging to new highs since September. They're not only transportation leaders, but market leaders as well. The solid line (top of Chart 5) show the air freight group (led by Fedex and UPS) also surging to new highs. Airlines are most sensitive to the trend of fuel. Which suggests that the plunge in crude oil (gray area) that started during September (down arrow) largely explains the surge in airlines. Some other transportation groups have yet to hit new highs.
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Chart 5
RAILS AND TRUCKERS ARE STILL TESTING OLD HIGHS... Trucking stocks are also benefiting from falling fuel prices. Chart 6, however, shows the Dow Jones U.S. Trucking Index ($DJUSTK) still in the process of testing its summer high. Rails are the weakest part of the transportation group, possibly because they're less sensitive to fuel trends. Even so, their chart pattern looks promising. Chart 7 shows the Dow Jones U.S. Railroad Index ($DJUSRR) testing highs extending back to the spring in an apparent "ascending triangle" price pattern. [An ascending triangle is identified by two converging trendlines, with a rising lower line and a flat upper line. It's usually a bullish pattern]. Technical odds favor new highs in both groups. That would also broaden, and add more validity, to the recent upside breakout in the DJ Transportation Average.
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Chart 6
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Chart 7
DOW INDUSTRIALS ARE STILL TESTING SUMMER HIGHS ... The Dow Jones Industrial Index is the only major U.S. stock index that hasn't hit a record high. Chart 8 shows the Dow still challenging its August/September intra-day highs. The presence of that overhead resistance may explain some of the short-term profit-taking that we've seen this week. The Dow is still in an uptrend, however, and technical odds favor an eventual move to new highs.
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Chart 8
MICROSOFT HITS 13-YEAR HIGH ... The Dow is getting a lot of help from Microsoft today. The daily bars in Chart 9 show Microsoft (MSFT) climbing above its July high to achieve a bullish breakout. The MSFT/SPX relative strength ratio (below chart) is rising as well. The longer range view is even more impressive. The monthly bars in Chart 10 show Microsoft hitting a new 13-year high. Earlier in the year, the stock broke through its 2007 high near 32 to achieve a major bullish breakout. Today's recovery high confirms that MSFT is now in a major uptrend. That bodes well for the technology sector and the market as a whole, including the Dow.
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Chart 9
