10-YEAR BOND YIELD HOLDS ABOVE 200-DAY AVERAGE -- BANKS BENEFIT FROM HIGHER YIELDS -- BANK ETF HITS NEW SEVEN YEAR HIGH -- PERCENTAGE LEADERS ARE KEYCORP, COMERICA, AND FIFTH THIRD BANCORP -- FALLING DOLLAR IS BOOSTING PRECIOUS METALS
10-YEAR TREASURY NOTE HOLDS FIRM ... The recent jump in bond yields has shown no sign of ending. The daily bars in Chart 1 show the 10-Year Treasury Note Yield trading back above its 200-day average (after dipping back below it last Friday). The TNX is also testing its March peak near 2.25%. Needless to say, this is an important test. A decisive close above the March high would signal that bond yields have finally turned higher. That would obviously be bad for bond prices which fall when yields rise. That's especially true of longer maturity Treasuries. The stock market appears to be watching bond yields as well. Over the last month, the stock market has pulled back every time bond yields have risen (see Chart 7). So far, the surge in bond yields hasn't done much damage to the overall stock market which is trading sideways. Although rising bond yields hurt more rate-sensitive parts of the market (like utilities, and REITS), it helps other groups -- like banks and insurers.
(click to view a live version of this chart)
Chart 1
KBW BANK INDEX BREAKS OUT... Recent messages have explained that rising bond yields (and a steeper yield curve) are good for banks. That's because they can charge higher rates for loans. My May 2 message showed the KBW Bank SPDR (KBE) on the verge of a bullish breakout. The daily bars in Chart 2 show the KBE having broken through its spring 2014 high to reach the highest level in seven years. Its relative strength ratio (top of chart) bottomed in January and is now trading at the highest level in ten months. It seems clear that investor funds are flowing into bank stocks. That will probably intensify if bond yields keep rising.
(click to view a live version of this chart)
Chart 2
RISING RATES HELP BANK PERFORMANCE... Chart 3 shows the impact of the 10-Year Treasury Note Yield (green line) has on the relative performance of bank stocks over the last five years. The black line is the "ratio" of the KBW Bank Index divided by the the S&P 500. Notice that the two lines have tended to rise and fall together. Falling bond yields during 2010 and 2011 hurt bank performance (falling ratio line). Banks started doing better after bond yields bottomed during 2012 (rising ratio). After weakening with bond yields during 2014, bank performance has been rising this year along with yields. At the moment, both lines are rising. After being one of the market's weakest groups, over the last year (while yields fell), banks have become one of this year's strongest groups (as yields have risen). Since February 1, banks have gained more than 13%, while the S&P 500 has risen 5%. [Life insurance stocks, which benefit from rising bond yields, have also outpaced the SPX].
(click to view a live version of this chart)
Chart 3
KEYCORP, COMERICA, AND FIFTH THIRD BANCORP LEAD... By glancing at bank relative strength gains today and over the last month, the following three stocks turned up as potential bank leaders. The strongest is Keycorp (KEY). Chart 4 shows the stock breaking out to a new seven-year high. Chart 5 shows Comerica (CMA) reaching a new eight-month high. Its relative strength ratio (above chart) has turned up as well. Chart 6 shows Fifth Third Bancorp (FITB) nearing a test of its December high. There are lots of other promising bank stocks. You might to take a closer look for yourself. Or, just stick with a bank ETF like the KBE or the KRE. Although both bank ETFs are hitting new highs, BKE has been the stronger performer over the last month. Stocks that usually get hurt by rising bond yields (like homebuilders, utilities, and REITs) are under pressure today.
(click to view a live version of this chart)
Chart 4
(click to view a live version of this chart)
Chart 5
(click to view a live version of this chart)
Chart 6
RISING YIELDS ARE KEEPING A LID ON STOCKS ... Although the market remains relatively flat, it does look like rising bond yields are making stock traders nervous. The hourly bars in Chart 7 show that the rising 10-year yield since April 20 (green line) have coincided with pullbacks in the S&P 500 (black bars). Stocks weakened last week as yields rose. A Friday pullback in yields led to a strong stock day. This week's rebound in yields has caused some stock selling. That would seem to suggest that the direction of bond yields is having some effect on the broader stock market, and that higher yields might lead to more stock selling. That would be especially true of rate sensitive stocks like utilities and REITs, and well as dividend payers. One way to protect against a jump in yields is to be in groups that stand to benefit (like banks and life insurance)
(click to view a live version of this chart)
Chart 7
FALLING DOLLAR BOOSTS SILVER... The Dollar Index is falling 1% today to a new four-month low. That's giving a boost to commodity markets, and precious metals in particular. Silver in particular is having a strong day. Chart 9 shows the Silver Trust iShares (SLV) gapping more than 3% higher in heavy trading. It is now testing its early April high and 200-day average. Chart 10 shows the Gold SPDR (GLD) jumping as well in heavy trading. Precious metal stocks have having a good day. A bounce in crude oil is putting some downside pressure on transportation stocks.
(click to view a live version of this chart)
Chart 8
(click to view a live version of this chart)
Chart 9
