DOWN TURN IN YIELD CURVE WEIGHS ON BANKS -- REGIONAL BANK SPDR BREAKS LONG-TERM TREND LINE -- NATURAL GAS STOCKS SHOW RELATIVE STRENGTH -- SECTOR PERFCHARTS REVEAL A POTENTIAL 2014 LEADER -- TECHNOLOGY SPDR HITS FIRST SUPPORT ZONE
DOWN TURN IN YIELD CURVE WEIGHS BANKS... Link for today's video. Regional banks got hit hard over the last few weeks as the yield curve turned down this year. The yield curve affects banking profits because banks make money by borrowing short, lending long and capturing the spread. Chart 1 shows the difference between the 10-YR Treasury Yield ($TNX) and the 2-YR Treasury Yield ($UST2Y). Overall, the yield curve remains relatively steep because $TNX is over 2% above $UST2Y. The current difference of 2.3% is almost twice the difference in May 2012. Nevertheless, the directional movement of the yield curve is important, as is the direction of interest rates. Even though the long-term trend for interest rates and the yield curve is also up, the short-term trend is down as both fell sharply in 2014. Notice that the Yield Curve 10-2 ($YC2YR) fell from a difference of 2.6% to a difference of 2.3% over the last six weeks. The indicator window shows the Correlation Coefficient (KRE,$YC2YR) to measure the link between the Regional Bank SPDR (KRE) and the yield curve. Unsurprisingly, these two are positively correlated, which means they move in the same direction. Regional banks benefited from a steepening yield curve in 2013, but 2014 has been a different story. Chart 2 shows four different Treasury yields over the last three years. Notice that stocks suffered when long-term yields fell sharply in 2011 (July to September) and 2012 (mid March to late July).
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Chart 1
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Chart 2
REGIONAL BANK SPDR BREAKS LONG-TERM TREND LINE... Chart 3 shows the Regional Bank SPDR (KRE) within an uptrend over the last three years. Notice that the ETF surged from the 26 area in November 2012 to the low 40s in late December 2013. Some sort of correction is certainly warranted after a 50+ percent advance. Even though the ETF broke the trend line extending up from the 2011 lows, I think this trend line is quite steep and the long-term uptrend should be given a little more space. The autumn lows mark the next support zone in the 34-35 area. The indicator window shows the Commodity Channel Index (CCI) breaking into negative territory for the first time since December 2012. Momentum is now bearish for KRE and the next potential setup will trigger when/if CCI becomes oversold (below -100). Notice how CCI bounce soon after dipping below -100 in May and November 2012. Once below -100, a subsequent move back above -100 is the first sign that momentum is reversing course.
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Chart 3
NATURAL GAS STOCKS SHOW RELATIVE STRENGTH ... Natural gas stocks are showing some serious relative strength in 2014. Chart 4 shows the NYSE Arca Natural Gas Index ($XNG), which includes Apache (APA), Devon (DVN), Kinder Morgan (KMI) and Williams Companies (WMB). After surging from late June to late October with a 15% gain, the index consolidated the next few months with a triangle. It looks like this triangle is ending as the index broke above the upper trend line with a surge in late January. Even though $XNG fell back, the index rebounded with a 1+ percent today to keep the breakout alive. The indicator window shows the price relative ($XNG:$SPX ratio) surging above its December highs with a big move the last three weeks. $XNG is easily outperforming the S&P 500 in 2014.
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Chart 4
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Chart 5
Chartists looking to play the natural gas space can also turn to the FirstTrust Natural Gas ETF (FCG). There is some overlap with the NYSE Arca Natural Gas Index, but FCG tends to focus on some of smaller players in the natural gas space. Chart 5 shows the ETF with similar chart characteristics. FCG surged from June to October, consolidated until January and broke out with a big move towards the end of January. The breakout got an immediate challenge with the dip to 19 yesterday, but the ETF surged back above 19.5 with a 2+ percent gain today. The indicator window shows the StockCharts Technical Rank (SCTR) bouncing near the 50 level in early January and moving above 90 this week. FCG shows some serious relative strength.
SECTOR PERFCHARTS REVEAL A POTENTIAL 2014 LEADER... PerfChart 6 shows the year-to-date performance for the nine sector SPDRs, and PerfChart 7 shows performance for their equal-weight counter parts. Note that these charts do not include today's price action. Eight of the nine sector SPDRs are down year-to-date with the Consumer Discretionary SPDR leading the way lower. In fact, the consumer discretionary sector is leading lower on both charts. The Utilities SPDR is the only sector SPDR sporting a gain year-to-date. Utilities are strong across the board because the top ten stocks in XLU are also up year-to-date (DUK,NEE,D,SO,EXC,AEP,SRE,PPL,PCG,PEG). As John Murphy pointed out in his recent Market Message updates, utility stocks and other interest sensitive groups benefitted from the decline in Treasury yields. Even though the market has been quite defensive this year, I did notice that the Technology SPDR and Equal-weight Tech ETF (RYT) were holding up better than the overall market. These two are down less than their benchmarks, the S&P 500 SPDR and the Equal-Weight S&P 500 ETF. Relative strength during a correction period suggests that techs may well lead the market when this correction ends.
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Chart 6
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Chart 7
TECHNOLOGY SPDR HITS FIRST SUPPORT ZONE... It has been a rough 2014 for stocks so now is a good time to pull out some weekly charts to gain some perspective. Chart 8 shows the Technology SPDR (XLK) over the last three years and the long-term trend is clearly up. With a decline the last three weeks, the ETF is testing support from the December lows. Further down, the fat trend line marks support in the 33 area. The indicator window confirms relative strength in XLK because the price relative broke out in late November and remains in an uptrend. XLK has been outperforming SPY since July and remains one of the top sectors in the stock market.
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Chart 8
CONSUMER DISCRETIONARY SPDR RETURNS TO BREAKOUT ZONE... Chart 9 shows the Consumer Discretionary SPDR (XLY) in a three year uptrend and a five week downtrend. This year's decline carried the ETF to broken resistance, which marks the first support in the low 60s. The fat trend line extending up from the 2011 lows marks support in the upper 50s. The indicator window shows the price relative in a three year uptrend as XLY outperformed the S&P 500. This indicator turned down over the last five weeks as weakness in Amazon (AMZN), Home Depot (HD), Ford (F) and Nike (NKE) weighed on this sector.
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Chart 9
XLF NEARS LONG-TERM TREND LINE... Chart 10 shows the Finance SPDR (XLF) over the last three years. The trend is clearly up and the recent three week decline pales in comparison to the prior advance. With this decline, XLF is near the first support zone in the 20.25-20.75 area. Using the box tool, I drew a magic marker style trend line extending up from the September 2011 low. There is also a support zone from broken resistance in this area. The white space between 20 and 21 shows the overlap of these two support zones. Further down, the August-October lows mark long-term support near 19. The indicator window shows the price relative peaking in July and edging lower the last six months. This means XLF is slightly underperforming the broader market (S&P 500). A break below the support level would indicate more relative weakness and this would be quite negative for XLF.
