WEAK GDP REPORT PUSHES STOCKS LOWER IN HEAVY TRADING AND THREATENS SUPPORT -- S&P 500 WEEKLY CHART SHOWS NEGATIVE DIVERGENCES -- BONDS ARE OUTPEFORMING STOCKS IN NEW YEAR -- DROP IN TWO-YEAR YIELD SHOWS SOME LOSS OF CONFIDENCE
FRIDAY SELLOFF IN HEAVY TRADING THREATENS CHART SUPPORT... Friday's disappointing fourth quarter GDP report of only 2.6% caused heavy selling of stocks and buying of bonds. The combination of falling stock prices and heavy volume gave the week's performance a negative look, and suggests tht underlying support levels will be tested. Chart 1 shows the Dow Industrials ending the week at the lowest close since mid-December. The Dow is now threatening its mid-December low and its 200-day moving average. The red volume bars show the two heaviest trading days on Tuesday and Friday, as prices were dropping. Not a good combination. Chart 2 shows the S&P 500 ending the week well below its 50-day average (in the heaviest trading of the month), and nearing a test of its January/December low and 200-day average. Chart 3 shows heavy selling in the Nasdaq Composite after it met resistance at its 50-day line.
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Chart 1
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Chart 2
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Chart 3
S&P 500 SHOWS WEEKLY NEGATIVE DIVERGENCES... Daily stock charts aren't the only ones show negative signs. The weeklies show loss of upside momentum as well. The weekly bars in Chart 4 show the S&P 500 still trading well above a rising support line drawn under its 2011, 2012, and 2014 lows. The purple line shows the 14-week RSI line falling throughout January to end below the 50-day line (dashed line). The fourth quarter RSI peak failed to confirm a new high in the SPX price bars, which has set up a "negative divergence" between it and the SPX (down arrow). That shows loss of upside momentum, which is usually followed by a period of consolidation or downside correction. The weekly MACD lines (top of chart) show a similar negative divergence. All of which suggests that the SPX may be headed for a test of its rising three-year trendline.
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Chart 4
MONEY IS FLOWING INTO TREASURIES... Some stock money is moving into Treasury bonds. While the S&P 500 was losing -3.1% during January, the 30-Year and 10-Year Treasuries gained 6.6% and 3.5% respectively. The stronger performance by the 30-year bond is because longer-dated maturities benefit most from global deflationary trend and plunging commodity prices. The solid green line in Chart 5 shows the 30-Year Treasury Bond hitting a record high. The 10-Year Treasury Note (dotted line) has reached the highest level in twenty months. A lot of that money is coming from foreign investors in Europe and elsewhere whose bond yields have fallen to record lows. The rising dollar also increases the appeal of U.S. bonds. Some of the bond buying, however, is most likely coming from nervous investors who are moving some money out of U.S. stocks.
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Chart 5
BONDS ARE GAINING ON STOCKS ... Bonds and stocks usually compete for investor money. Stocks do better when investors are optimistic. Bonds do better when they turn more cautious. The best way to monitor their relative performance is with a relative strength ratio. The green line in Chart 6 plots a "relative strength ratio" of the 30-Year Treasury Bond divided by the S&P 500. During 2008, for example, the surging ratio showed a massive shift out of stocks and into bonds. That trend reversed in spring 2009 when the bond/stock ratio peaked. That marked the beginning of the current bull market in stocks as investors bought stocks and sold bonds. The falling ratio since then has favored stocks over bonds. The jump in the ratio during 2011 was caused by a nearly 20% correction in stocks (first circle) and a temporary flight to bonds. The ratio has declined in an orderly fashion since then. Until now. To the bottom right, you can see the bond/stock ratio rising to the highest level in 18 months (second circle). A rising bond/stock ratio is usually a warning that investors are turning more defensive, and may start selling more stocks. Chart 6 also shows the ratio nearing a test of the falling six-year resistance line. A move above that line might carry a bigger warning for stocks.
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Chart 6
NOW SHORT-TERM YIELDS ARE FALLING... Bond yields have been falling all year as shown by the 10-year T-Note Yield (top of chart). That's due primarily to global deflationary trends. The trend in the 2-Year Treasury yield, however, has been rising over the last year. That's due mainly to expectations for a Fed hike in short-term rates sometime this year. [Shorter term rates are more sensitive to Fed policy]. The chart, however, shows a sharp drop in the 2-Year Treasury Yield during January. That hints that investors are becoming more skeptical about the Fed raising rates at midyear. One factor contributing to that lower trend is more signs of global deflation here and abroad. [January consumer prices in Europe fall -0.6%, the biggest drop since mid-2009]. The other factor may simply be growing caution about the weakness of the global economy which may start to hurt the U.S. [Foreign weakness is already hurting U.S. exports. The rising dollar has lot to do with that]. Falling short-term yields also suggests that investors are becoming less optimistic than the Fed.
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Chart 7
FALLING YIELDS HURT BANKS... Financial stocks lost -8% during January and were the month's weakest sector. Banks were one of the biggest reasons why with a January drop of -11%. The daily bars in Chart 8 show the PHLX Bank Index falling well below moving average lines and dangerously close to its October low. The solid line (top of chart) shows January's drop in the BKX/S&P 500 ratio. I suspect that's mainly the result of the sharp drop in short and long term rates during January. Banks need higher rates to make money. That's especially true of longer maturity rates which is what they charge for loans. They also need a higher "yield curve" which is the difference between long and short term rates. [That's because they can charge higher long term rates to borrowers and pay lower short-term rates to depositors]. The spread (yield curve) between 10- and 2-year yields is very close to dropping to a new seven-year low. That's not good for banks.
