SELLOFF IN ENERGY SHARES MAY SUGGEST OIL PEAK -- THAT'S HELPING AIRLINES AND TRANPORTS -- 10-YEAR BOND YIELD BACKS OFF FROM MARCH HIGH -- THAT'S HELPING RATE-SENSITIVE REITS
ENERGY STOCKS BACK OFF FROM 200-DAY AVERAGE... While stocks in general are rebounding from yesterday's selloff, some interesting rotations are going on beneath the surface. One of the has to do with a pullback in energy shares and the price of crude. Energy stocks are the day's weakest group. The daily bars in Chart 1 show the Energy Sector SPDR (XLE) falling for the third day after an unsuccessful test of its 200-day moving average (red line). The 14-day RSI (top of chart) is slipping below the 50-day line after reaching the overbought threshold of 70 three weeks ago. A few weeks ago, the XLE exceeded chart resistance at its February peak near 82. It has since fallen back below that breakout level. That raises the possibility of a rally failure. That could be important for a number of reasons. For one thing, energy stocks often lead turns in the price of crude. The January bottom in the XLE gave early warning of a March bottom in crude. If the recent setback in the XLE gets much worse (like falling below its 50-day line), that would suggest that the rally in crude has run its course (at least for now). If crude is peaking, that would lend support to energy-sensitive transportation stocks, especially airlines and truckers. Interestingly, both groups are leading a strong bounce in transportation stocks today.
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Chart 1
UAL AND DELTA LEAD TRANSPORTS HIGHER... While energy stocks are the day's weakest groups, transports are the strongest. Airlines (and truckers) are leading the transports higher. And it's coming just in the nick of time. Chart 2 shows United Continental Holdings (UAL) climbing nearly 5% to lead the airline group (and the Dow Transports) higher. More importantly, the airline leader is bouncing off its 200-day moving average. Chart 3 shows Delta Air Lines (DAL) in an even stronger position. DAL is up more than 3% today. Yesterday's intraday low not only bounced off its 200-day average, but is higher than its early April low. This would be a logical spot for the airlines to attempt a rally. I suspect today's selloff in energy stocks (and the price of crude) is a big reason why. Crude is falling 3% today. Truckers are also having a strong day. That's coming at a crucial point for the transportation group in general. Chart 4 shows the Dow Jones Transportation Average struggling to find support along its 2015 lows and its 200-day average. I've expressed concern about the possibility of a chart breakdown in the fuel-sensitive transports. Today's selling in crude oil and energy stocks may prevent that from happening. The gray area in Chart 4 shows the inverse correlation between energy stocks and the transports. It's no coincidence that transports are bouncing off 200-day averages while the energy group is turning down from its 200-day line (red arrow).
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Chart 2
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Chart 3
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Chart 4
TEN-YEAR YIELD BACKS OFF FROM RESISTANCE... The recent surge in Treasury bond yields has weighed on stocks, and rate sensitive stocks in particular. Chart 5 shows the 10-Year Treasury Note Yield backing off from its March peak at 2.25%. It's also stalling at a major resistance line extending back to the start of of 2014. The 14-day RSI line (top of chart) also shows it in an overbought condition over 70. That may suffice to stall the jump in rates, at least for the time being. The pattern of rising bottoms in February and April, however, suggest that long-term rates have probably bottomed and are eventually headed higher. Rate sensitive stocks are getting some relief today, however. That may explain why REITs are having a strong day.
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Chart 5
OVERSOLD REITS BOUNCE OFF 200-DAY LINE... REITs may also be getting a boost from today's pullback in both the price of oil and bond yields. Chart 6 shows that the Dow Jones REIT Fund (RWR) has been one of the market's weakest groups this year. That has a lot to do with the back-up in bond yields. Dividend-paying REITs compete with bonds for yield. As a result, they suffer when bond yields are rising and bond prices are falling -- as they started to do in January when REITs peaked. The rising price of oil since January has also hurt REITs by pushing yields higher. A drop in oil, and a pullback in bond yields, is most likely giving a much-needed boost to REITS. Chart 6 shows an oversold RWR bouncing off its 200-day moving average.
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Chart 6
OVEROLD DOLLAR IS BOUNCING... There's one more piece to today's intermarket puzzle, and that's a bounce in the oversold dollar. Chart 7 shows the Power Shares Dollar Index Fund (UUP) bouncing off chart support along its February low. Its 14-day RSI line (top of chart) shows it to be in oversold condition. The falling dollar since March has been one of the reasons that commodities have been rising, and oil in particular. A possibility of a dollar bottom probably explains why commodity prices (led by oil) are falling today (which is where we began today's message). Chart 8 shows the PowerShares Energy Fund (DBE) falling -2.5% today to lead the commodity complex lower. The chart shows that the dollar peak a couple of months ago gave a big boost to energy prices (and other commodities). Today's oversold bounce in the dollar may be signalling that the commodity bounce has run its course for now. That should encourage some profit-taking in commodity related stocks, and some nibbling in transportation stocks and REITS. The latter is especially true if commodity weakness relieves inflationary pressure on Treasury bonds.
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Chart 7
