MARKET LIKES FED INTENTION TO STAY PATIENT -- OVERSOLD ENERGY STOCKS LEAD GLOBAL STOCK RALLY -- XLE IS ALSO IN POTENTIAL SUPPORT ZONE-- US STOCK INDEXES REGAIN 50-DAY LINE -- CANADIAN STOCKS BOUNCE SHARPLY OFF OCTOBER LOW
STOCKS AND BOND YIELDS JUMP... The Fed promised to remain "patient" in raising rates next year. Stocks liked the news, Treasuries didn't. Fixed income yields rose with the bigger gains in the shorter end of the yield curve. Chart 1 shows the 5-Year T-Note Yield ($FVX) climbing sharply on the news. The yield on the 10-Year Treasury note also rose, but not as dramatically. That caused profit-taking in Treasury bonds, but aided a bounce in riskier high-yield bonds. Chart 2 shows the High Yield Corporate Bond iShares (HYG) jumping sharply. The HYG was also aided by a bounce in energy prices and energy shares. [Most of the high-yield bond losses have been in energy companies]. Foreign stock ETFs tied to oil like Brazil (+4.8%) and Russia (+10%) also jumped sharply. The bounce in oil assets (and the Fed statement) supported a bounce in U.S. stocks.
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Chart 1
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Chart 2
OVERSOLD ENERGY SECTOR BOUNCE ... With the plunge in oil prices, energy shares have been the weakest part of the U.S. stock market. The fact that energy shares are in a deeply oversold condition (and in an area of potential support) contributed to today's energy rally, and may be hinting that the oil plunge is also overdone. The daily bars in Chart 3 show the Energy SPDR (XLE) climbing more than 4% today (in heavy trading) to lead the U.S. market higher. The 14-day RSI line (above chart) also shows a short-term "positive divergence". [A positive divergence exists when the second trough in the RSI line (below 30) shows "higher lows" combined with a "lower low" on the price chart]. At the very least, that positive divergence suggests that energy shares are due for a bounce which may have already started. The XLE is also in an area of potential chart support.
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Chart 3
XLE TESTING MAJOR SUPPORT LINE... Sometimes we can get clues about the direction of oil by studying the charts of energy shares. Since they're so closely correlated, support in one can lead to support in the other. The weekly bars in Chart 4 shows the Energy SPDR (XLE) bouncing off a major support line drawn under 2009-2011 lows. The XLE is also trading between the 50% and 62% Fibonnaci retracement lines which often act as important support levels. In addition, the 14 week RSI line (top of chart) is stabilizing at the 30 level which is the most oversold level since late 2008 (see circle). All of those factors combined may be hinting that oil stocks are in a potential support zone and that the recent plunge in energy shares (and oil) is overdone. Any relief in the energy patch would take a lot of pressure off foreign stocks tied to oil, and would help boost U.S. shares.
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Chart 4
STOCK INDEXES REGAIN 50-DAY LINES... Today's dovish Fed statement, combined with surging energy shares, gave a big boost to U.S. stocks. Chart 5 shows the Dow Industrials climbing 288 points (1.69%) to end the day back over its 50-day line. Its 14-day RSI is bouncing from oversold territory at 30. Chevron (4.2%) and Exxon Mobil (3%) were two of the Dow's biggest gainers. Chart 6 shows the S&P 500 gaining 2% to also regain its 50-day line. The SPX found support at its 38% Fibonacci retracement line. [The Nasdaq also ended above its 50-day line]. Chart 7 shows the Russell 2000 iShares (IWM) climbing 3% on rising volume. Small caps have been more resilient of late, partially owing to their lesser ties to foreign markets. Seasonal trends also turn more positive for small caps and the broader market during the second half of December.
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Chart 5
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Chart 6
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Chart 7
CANADIAN STOCKS BOUNCE OFF SUPPORT... Canadian stocks have been hit especially hard by the plunge in energy and commodity prices. There may finally be some good news for our northern neighbor. The daily bars in Chart 8 show the Toronto TSX Index rebounding 2.5% today to help lead the global rally in stocks. Most of its gains came from energy (+5.7%) and and material (+4%) stocks. Chart 8 shows the TSX bouncing off potential chart support along its October low. And it's done so on rising volume. It's too soon to call this a bottom. But it's a step in the right direction. And it may also be hinting that the plunge in commodity markets (and oil in particular) is overdone.
