BANKS CONTINUE TO ATTRACT MORE INTEREST -- SO DO AUTOS -- THE DJ AUTOMOBILE INDEX HAS BULLISH LONG TERM PATTERN -- TESLA AND FORD ARE RECOVERING FROM FOURTH QUARTER CORRECTION -- GM IS IN SHORT-TERM CORRECTION -- 10 YEAR YIELD BOUNCES OFF 50-DAY LINE
BANKS ARE LEADING STRONG FINANCIAL SECTOR... Last Wednesday's message wrote a positive article on bank stocks, and showed the group doing better on both an absolute and relative basis. Chart 1 is an updated version of the KBW Bank SPDR (KBE), and shows the ETF climbing 1% today and on the verge of a new multi-year high. That's following positive earings reports from JP Morgan and Wells Fargo yesterday, and Bank of America today. Banks are leading the financial sector higher today as a result. The gray matter plots a ratio of the KBE divided by the SPX, and shows that the "relative strength" of banks has also been climbing since September. In fact, the relative performance of banks has improved since last spring when bond yields turned up. As I explained in that and earlier messages, rising bond yields are good for banks because it increases their "net interest margin" which is the difference between what they pay depositors (flat short-term rates) and what they charger borrowers (higher long term rates). A strong banking sector is also a good sign for the rest of the stock market and the economy.
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Chart 1
AUTOS ARE ALSO DOING BETTER ... Another positive sign for the market and the economy is the resurgence in auto stocks. It's also good for bank stocks since buyers have to take out loans to buy those new cars. Chart 2 shows the Dow Jones U.S. Autombiles Index ($DJUSAU) having cleared a resistance line drawn over its 2007/2011 highs during 2013. It is currently consolidating above the breakout point. The gray area plots the auto/SPX ratio and shows it turning up during 2009 and again during 2012. A headline in my December 7 message read: "GM Leads Autos Higher as Tesla Jumps". That maker of luxury electric cars is still jumping.
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Chart 2
TESLA IS JUMPING AGAIN... When I last wrote about Tesla Motors (TSLA) on December 7, the stock had just starting to climb from its 200-day moving average (red line) after having retraced 50% of its previous year's climb. Since then, the auto stock has jumped to the highest level in two months and has regained its 50-day average (blue line). Upside volume has also been impressive. The stock's relative strength ratio (above chart) is also climbing again after peaking last October. The stock opened sharply higher this morning after a positive report yesterday. Ford is also climbing.
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Chart 3
FORD CLEARS 50-DAY LINE... Chart 4 shows Ford (F) clearing its 50-day average for the first time in two months in an attempt to regain its upside momentun. The stock peaked last October and took a big hit during December when it gapped down to a six-month low. It climbed back above its 200-day line earlier this month and its 50-day line today. Its relative strength ratio (above chart) is starting to climb as well. The 14-day RSI line (below chart) has risen to the highest level in three months which implies stronger upside momentum. A glance at its longer-range trend also looks promising. The monthly bars in Chart 5 show Ford (F) bottoming in 2009 after ten years of weak performance. During 2011, the stock hit the highest level in a decade by exceeding its 2004 peak. The stock has fluctuated since then between 18 on the upside and 10 on the downside. The monthly chart looks to me look a major bottoming formation. It needs a decisive close above 18, however, to achieve a major bullish breakout. A stronger economy would increase the odds of that happening.
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Chart 4
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Chart 5
GENERAL MOTORS PULLS BACK FROM OVERBOUGHT CONDITION ... Back on December 7, GM was leading the auto group higher. Not at the moment. The weekly bars in Chart 6 show General Motors (GM) pulling back from an overbought condition as reflected in its 14-week RSI line (above chart). It's longer range uptrend, however, is still intact. The daily bars in Chart 7 show the stock threatening its 50-day average. So far, the GM pullback looks pretty mild. Any further drop should find initial support along its second half highs near 38 (see trendline). The fact that the stock has just announced a dividend for the first time in six years is another positive factor.
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Chart 6
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Chart 7
TEN YEAR TREASURY YIELD IS BOUNCING OFF 50-DAY LINE... The 10-Year T-Note yield fell sharply last Friday following a very weak jobs report, which may also have contributed to a stock selloff on Monday. Chart 8, however, shows the TNX bouncing off its 50-day line and initial chart support near 28. In my view, a rising TNX implies economic strength which is good for stocks. That may explain why stocks have regained their footing over the last two days.
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Chart 8
NASDAQ AND S&P 500 TURN BACK UP ... One of the advantages of Monday's stock pullback was that it gave us a couple of additional support levels to watch. The basic definition of an uptrend is a series of rising peaks and troughs. In order for a downturn to occur, prices have to drop below a previous low. Chart 9 shows the Nasdaq Composite hitting a new 13-year high today to keep its uptrend intact. Monday's intra-day drop ended at 4098 which was a successful retest of its early January low near 4100 and its December high (see trendline). Its RSI line (above chart) also bounced off the 50-day line which is positive. We now have two new chart points to watch in the Nasdaq to help measure its uptrend. The first is Monday's intra-day low at 4098. The other is its 50-day average (blue line) which currently sits at 4047. The Nasdaq would have to drop below both points to signal the start of a downside correction. Chart 10 shows a similar situation in the S&P 500. Although it has yet to resume its uptrend, the SPX found support on Monday at 1015 which kept it above its November/December high and its 50-day average. Notice that the flat line turned from red to green in mid-December when a new high was hit. That's because a broken resistance level (red line) becomes a new support level (green line) on subsequent pullbacks. So far, those initial support levels have held.
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Chart 9
