LATE WEEK STOCK RALLY IS BASED ON MORE THAN A JOBS REPORT -- SPIKE IN BOND YIELDS PEAKED ON THURSDAY WHICH BOOSTED DIVIDEND ISHARES -- THE DJ COMPOSITE AVERAGE BOUNCES OFF 200-DAY AVERAGE -- BRITISH MARKETS BOUNCE ON ELECTION RESULTS
10-YEAR TREASURY YIELD BACK BELOW 200-DAY AVERAGE... The report of 223,000 jobs created in April (and a drop in the unemployment rate to 5.4%) helped spark a strong stock rally on Friday. It's not that the report was so strong. In fact, it barely met expectations. But it was a lot stronger than an unusually weak report in March. Apparently, the reason traders liked the April report was that it was stronger than March, but not too strong. It signalled that the economy wasn't slowing as much as had been feared, but wasn't growing fast enough to warrant a Fed rate hike anytime soon. In other words, the status quo. I'd like to suggest that there are other intermarket forces as well that contributed to Friday's strong stock rally. First of all, it was global in scope. Markets surged in Europe and Asia. Clearly, something bigger is going on. Let's start with the recent spike in bond yields. Chart 1 shows the 10-Year Treasury Note Yield backing off from its March peak and trading back below its 200-day moving average. That stabilized bond prices, which had fallen sharply over the last month, and rate-sensitive stock groups like REITs and homebuilders. The spike in bond yields started in Europe, and may have ended there. The German 10-Year Bund Yield suffered a huge downside reversal day on Thursday, which contributed to the peak in Treasury yields. The stock market turned higher on Thursday after yields peaked. So did some of the weaker rate-sensitive stock groups that pay dividends
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Chart 1
DIVIDEND ISHARES STRENGTHEN ... Although major U.S. stock indexes have been consolidating for several months, some portions of the market have been under pressure. A lot of that has to do with the upturn in bond yields. That hurts dividend paying stocks. Chart 2 shows the DJ Dividend iShares (DVY) falling to its 200-day average during March. That first quarter downturn coincided with the first spike in the 10-year yield (green line). The March bottom in the DVY coincided with a downturn in the green line. The past month's yield spike caused more selling in the DVY which brought it dangerously close to its 200-day line again. Friday's strong bounce put the DVY back above its 50-day line. Utilities are the biggest part of the DVY. Other large groups include energy, staples, and financials. The message is this. Friday's pullback in bond yields may have saved the day for rate-sensitive groups, many of which were in danger of falling below their 200-day lines. That includes homebuilders, utilities, and REITS. I suspect that helped stabilize the rest of the market.
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Chart 2
DOW JONES COMPOSITE INDEX BOUNCES OFF 200-DAY AVERAGE... It may have struck you by now that a lot of markets are testing 200-day averages. Here's another one. Chart 3 shows the Dow Jones Composite Average ($DJA) bouncing off its 200-day line on Thursday. The DJA includes all 65 stocks in the three Dow Averages -- 30 industrials, 20 transports, and 15 utilities. The two weakest parts of the Dow complex have been utilities and transports. Rising bond yields pushed utilities lower, while higher oil prices have hurt the transports. Both may have seen the worst. Transports bounced late in the week, and utilities may be next. Utilities should benefit from a pullback in yields. Energy stocks were the week's worst performers. My Thursday message showed the Energy Sector SPDR (XLE) pulling back from its 200-day average. If that's hinting at a pullback in energy prices, that should help fuel-sensitive transports. The bottom line is that the DJA has survived a test of a major support line. That's also good for the rest of the market. So is the rebound in foreign stocks, which includes Britain and rest of Europe.
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Chart 3
UK ELECTION BOOSTS BRITISH MARKETS ... British markets rose sharply on Friday after the decisive victory by the UK Conservative Party. Chart 4 shows the London FTSE Index jumping more than 2%. British bonds (gilts) also bounced. Chart 6 shows the 10-Year UK Treasury Yield pulling back from its 200-day average (just like Treasuries). The British Pound also gained. That led a strong rebound in the rest of Europe, but maybe not for the same reasons.
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Chart 4
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Chart 5
GERMAN DAX BOUNCES OFF SUPPORT LINE... Eurozone stocks also ended the week on a strong note. Several of them gained more than 2% on Friday. Chart 6 shows the German DAX Index jumping 2.65%. It's bouncing off a rising support line drawn under its October/December lows. That keeps its uptrend intact. Part of the reason for eurozone strength may have come from a weaker Euro which dropped on Friday (green bars). Chart 6 shows that a falling Euro has been good for the export-oriented German stock market. Notice that the upturn in the Euro a month ago coincided with a pullback in the DAX (see arrows). Yesterday's pullback in the Euro may have contributed to Friday's stock gain. Something else to consider. Chart 7 shows the Euro bounce coinciding with a spike in German bond yields. If that yield spike ended on Thursday, the Euro bounce may have ended as well. [Notice the 10-Year Bund Yield backing off from its 200-day line]. Carrying that analysis a step further, a drop in the Euro would strengthen the dollar. My Thursday message showed the Dollar Index in an oversold condition, and ripe for a rebound. A Euro pullback would help that along. And a stronger dollar could restrain (or weaken) the oil market which would help transportation stocks. Lower oil would also reduce inflation pressure on the bond market which would help rate-sensitive stocks. So there's a lot going on beneath the surface. It's not all about jobs.
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Chart 6
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Chart 7
FTSE ALL WORLD INDEX STILL IN AN UPTREND... I've recently expressed concern about the short- to intermediate term trend in the U.S. stock market (especially as we enter the month of May). At midweek, it looked like a downside correction might be starting as stock indexes hit a four-week low. A late week rally in global stocks, however, has relieved those concerns and presents a stronger picture. Chart 8 shows the FTSE All World Index (which includes the U.S.) bouncing off its 50-day average (blue line) and chart support along its 2014 peaks. [Previous resistance usually becomes now support. Hence, the flat line turning from red to green]. The ability of the All World index to maintain its uptrend bodes well for global markets, including the U.S. A lot may also depend on all those 200-day lines shown in this message continuing to hold.
