FALLING BOND YIELDS HELP EXPLAIN WHY DIVIDEND ISHARES ARE SHOWING RELATIVE STRENGTH -- DRUG STOCKS LEAD HEALTHCARE SECTOR HIGHER -- LILLY AND MERCK HAVE STRONG CHART PATTERNS AND ARE NEARING 2008 HIGHS
BOND YIELD CONTINUES TO WEAKEN... The daily bars in Chart 1 show the 10-Year Treasury Note Yield ($TNX) falling to the lowest level in a month. It also remains below moving average lines. Part of the yield drop may be the result of some flight to the safety of Treasury bonds as global tensions rise and an overbought stock market looks vulnerable to the type of profit-taking that we saw on Tuesday. Foreign stocks remain under pressure today. Falling bond yields are especially good for dividend paying stocks which remain one of the strongest parts of the stock market. Dividend payers also include traditionally defensive stocks in consumer staples, healthcare, utilities, and REITS. Those defensive qualities may also add to their appeal.
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Chart 1
DIVIDEND PAYING ETF DOES BETTER WHEN RATES FALL ... Chart 2 compares the trend of the 10-Year Treasury Note (green line) to a ratio of the DJ Dividend iShares (DVY) divided by the S&P 500 (gray area). The chart shows that the DVY/SPX ratio tends to fall when bond yields rise -- like last spring when a spike in bond yields hurt dividend paying stocks. By contrast, falling bond yields help their relative performance, as happened at the start of 2014 when bond yields peaked. [The DVY is composed of 100 U.S. stocks with a 5-year history of dividend growth]. The circled area to the far right shows another spike in DVY performance during June as yields weakened.
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Chart 2
DRUGS LEAD HEALTHCARE SECTOR HIGHER... Another defensive group attracting new money is healthcare. Chart 3 shows the Health Care SPDR (XLV) hitting a record high today. It is the day's strongest sector. Drugs are leading. Chart 4 shows Market Vectors Pharmaceutical ETF (PPH) also in a leadership position. The relative strength lines above both charts are turning up after being relatively flat during the second quarter. Two of the strongest charts belong to Lilly and Merck. Chart 5 shows Eli Lilly breaking out to a new high. Chart 6 shows Merck very close to doing so. Merck is also in the process of testing a long-term resistance level.
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Chart 3
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Chart 4
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Chart 5
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Chart 6
MERCK AND LILLY NEAR RECORD HIGHS... The monthly bars in Chart 7 show Merck moving close to its 2000 record high just above 60. A close through that barrier would represent a bullish breakout. Its relative strength ratio (above chart) appears to be turning up as well. The flat ratio shows that Merck hasn't shown much leadership since 2007. That may be changing for the better. The monthly bars in Chart 8 show Eli Lilly trading at a fourteen year high. Its relative strength ratio (top of chart) may be just starting to turn up as well. Both drug stocks are included in the DJ Dividend iShares (DVY). Utilities, the year's strongest sector, are the biggest group in the DVY. Their 3.7% yield compares favorably to the 2.6% yield for the 10-year T-Note and a 2% yield for the S&P 500.
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Chart 7
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Chart 8
DOW UTILITIES ARE THE LAST TO HIT A NEW RECORD ... The daily bars in Chart 9 shows the Dow Utilities having recently surged to a new yearly high. Its relative strength ratio (top of chart) has turned up as well. The fact that utilities have been the year's strongest sector is unusual. That's because utilities have been the market's weakest sector since the bull market began in March 2009. They've also been the weakest of the three Dow Averages. Over the last five years, the Dow Utilities gained 75% versus 138% for the Dow Industrials and 225% for the Dow Transports. They're also the last Dow group to exceed their 2007 highs. The monthly bars in Chart 10 show the Dow Utilities rising above their January 2008 high at 555.
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Chart 9
