BOND YIELDS CONTINUE TO RISE AS BOND PRICES FALL -- THAT'S HURTING BOND PROXIES LIKE REITS AND UTILITIES -- RISING RATES PUSH GOLD SHARPLY LOWER -- RISING OIL PRICES ARE HURTING TRANSPORTS -- SMALL STOCKS BREAK 50-DAY AVERAGE
BOND YIELDS CONTINUE TO MOVE HIGHER... After jumping sharply yesterday, Treasury bond yields are climbing again today. [Yesterday's jump followed big gains in Eurozone bond yields]. Chart 1 shows the 10-Year Treasury Note yield trading at the highest level since mid-March. The jump in bond yields is obviously bad for bond prices which fall when yields rise. Chart 2 shows the 20+Year Treasury iShares (TLT) falling below its 50-day average toward a test of its March low. Corporate bonds are also falling. Chart 3 shows Investment Grade Corporate Bond iShares (LQD) also falling hard. They too appear headed for a test of their March low and 200-day average. I explained yesterday why rising bond yields were positive for banks and insurers. At the same, rising yields are bad for rate-sensitive stocks viewed as bond proxies like utilities and REITs. They're been two of the weakest market groups over the past two days.
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Chart 1
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Chart 2
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Chart 3
UTILITIES AND REITS WEAKEN... Utilities and REITs are among the weakest stock groups today, which is largely due to the jump in bond yields and drop in bond prices. Chart 4 shows the Utilities Sector SPDR (XLU) threatening to fall below its 200-day moving average. Its (red) relative strength ratio shows how bad it's done since January. That was when bond yields started rising. Utility stocks suffer when bond yields rise, as do most dividend paying stocks. That includes REITS (Real Estate Investment Trusts). The price bars in Chart 5 show the Dow Jones REIT ETF (RWR) falling toward a test of its March low and 200-day average. The green line shows how closely REITs are linked to falling bond prices. That suggests that traders are taking the threat of rising bond yields seriously. So is their selling of gold and gold stocks.
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Chart 4
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Chart 5
RISING YIELDS HURT GOLD WHILE COPPER JUMPS... Gold stocks are also one of the day's weakest groups. That's because the price of gold is down $30 (-2.5%) today. Over the weekend, I wrote that gold doesn't do well in rising stock market environment. Although stocks are correcting this week, so are bond prices. I think it's the drop in bond prices (and rise in yields) that's hurting gold today. Gold is a non-yielding asset. It does better in a low rate environment. It does worse when bond yields are rising -- as they're doing today. The daily bars in Chart 6 show Gold Trust Shares (GLD) gapping sharply lower today. Compare that to the direction of the 10-Year T-Note yield (below chart). The January gold peak concided with the January bottom in bond yields. The upturn in yields yesterday and today are pushing precious metal assets lower. By contast, copper prices are rising, as shown in Chart 7. I suggested over the weekend that copper was a better alternative than gold. Copper usually does better in a rising rate environment.
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Chart 6
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Chart 7
TRUCKERS LEAD TRANSPORTS LOWER... I mentioned yesterday that a new 2015 high in crude oil contributed to a big drop in airlines. Today's selling is mainly in rails and truckers. Truckers are also fuel-sensitive. Chart 8 shows the Dow Jones US Trucking Index in danger of dropping below its February low. That would be a serious chart breakdown. It's already trading below its 200-day average (as are the rails). Notice also that the mid-March peak in trucking stocks concides with the March upturn in crude oil. That shows that the rising price of fuel is taking a negative toll on economically-sensitive transportation stocks. [Crude is trading higher again today]. Chart 9 shows the Dow Transports slipping back below their 200-day moving average as well. A drop to a new 2015 low would be a negative sign for it and the rest of the market. The relative strength ratio below Chart 9 shows that the negative divergence between the Dow Transports and Dow Industrials is the worst since last October. That's not good for either one. Let's hope it doesn't get much worse.
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Chart 8
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Chart 9
SMALL CAPS BREAK 50-DAY LINE... Another short-term warning signal is coming from small cap stocks. Chart 10 shows the Russell 2000 Small Cap index falling below its 50-day moving average. [Midcaps are doing the same]. The small cap/large cap ratio (top of chart) has fallen throughout April, and has broken a rising support line starting last October. That signals that large caps may be vulnerable for a setback as well.
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Chart 10
SELL IN MAY?... Today is the last trading day in April, which is historically the market's third strongest month (behind November and December). April also ends the "best six month" seasonal period that starts in November. That makes April a good time to take some money off the table. Which leads us to the annual "sell in May" discussion. The longer-range trend of stocks is up. That being said, there are enough warning signs to make me more cautious over the short to intermediate term. That includes rising global bond yields and heavy selling of rate sensitive stocks, the drop in transportation stocks resulting from the rising oil prices, and selling in small cap stocks. With April ending a period of seasonal strength, and May beginning a period of relative historical weakness, it might not be a bad idea to take some stock money off the table. The Stock Traders Almanac (which invented the "sell in May" rule) offers one way to determine if it's time to do some May selling. That's by using MACD lines for timing purposes. Unfortunately, there's a warning there too. The daily bars in Chart 11 show a big "negative divergence" between the S&P 500 Index and its MACD lines. The two lines are still positive, but just barely (see arrow). A drop by the black line below the red line might encourage some May selling. Chart 12 shows that weekly MACD lines for the S&P 500 have been dropping for over a year, and are already in negative territory.
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Chart 11
