LIFE INSURERS AND INVESTMENT SERVICE STOCKS BENEFIT FROM RISING BOND YIELDS -- PRUDENTIAL AND GOLDMAN SACHS ACHIEVE UPSIDE BREAKOUTS -- THE WISDOM TREE JAPAN HEDGED ETF ACHIEVES NEW RECOVERY HIGH ON PLUNGING YEN
RISING RATES HELP INSURANCE PORTFOLIOS... Financial stocks are starting to show upside leadership at the same time that bond yields are starting to rise. Banks usually benefit from rising bond yields because they can charge higher rates for their loans. Two other financial groups have actually done better than banks this week. They include investment services (brokers) and life insurance. Let's start with life insurance. The black bars in Chart 1 show Prudential Financial (PRU) surging today to a new record high. It's the strongest stock in that group. The black line shows the stock's relative strength ratio turning up this month to a new three-month high. The green line on top shows the 10-Year T-Note yield also climbing this month. A correlation can be seen between the two lines. Prudential underperformed the market between January and May as bond yields were falling. It has been outperforming during September as yields have started to rise. The same analysis is true of other life insurance leaders like Lincoln National (LNC) and Metlife (MET). There's a good reason why insurers benefit from higher rates. They invest three-quarters of their premiums in Treasury bonds. As a result, they receive lower income payments when bond yields are low. Higher yields allow insurers to reinvest maturing bonds in their portfolio in higher yielding bonds.
(click to view a live version of this chart)
Chart 1
GOLDMAN SACHS HITS SEVEN-YEAR HIGH... Goldman Sachs (GS) is one of the leaders in the investment services group. The weekly bars in Chart 2 show the stock trading above its 2009 today to hit a new seven-year high. The green area shows the trend of the 10-Year T-Note yield over the last eight years. There again, a correlation between the two can be seen. Falling bond yields between 2008 and 2012 coincided with a weaker stock performance. It wasn't until 2012 when bond yields started climbing that the stock started doing better. The 100-week Correlation Coefficient between the two (below chart) has been positive since 2008 and has current reading above .75. It's no coincidence that this month's upturn in the bond yield has coincided with an upside breakout in the stock. Two other strong leaders in the group are Charles Schwab (SCHW) and TD Ameritrade (AMTD). The first of the two is hitting a new record high today while the second is close to doing so.
(click to view a live version of this chart)
Chart 2
SIX-YEAR YEN LOW CAUSES UPSIDE BREAKOUT IN JAPAN STOCK ETF... With the dollar surging, the Japanese yen has tumbled to the lowest level in six years. A falling yen is bullish for Japanese stocks. The Japanese Nikkei Index is up more than 1% today and is trading at the highest level since January. Chart 3 shows that the Wisdom Tree Japan Hedged Equity ETF (DXJ) has already broken out to a new recovery high. As I've explained in previous messages on the subject, the DXJ is the most popular way to play the rising Japanese market. That's because it hedges out the negative effect of a falling yen. Foreign investors buying Japanese stocks are also buying the yen. A falling yen subtracts from profits in rising Japanese stocks. The DXJ prevents that from happening.
