DOW INDUSTRIALS HIT THREE-MONTH HIGH -- WEAKER TRANSPORTS AND UTILITIES SHOW SOME IMPROVEMENT -- BOND YIELDS TURN DOWN AS BOND PRICES BOUNCE OFF CHART SUPPORT -- THAT HELPS HOMEBUILDERS, REITS, AND TELECOM ETFS STAY ABOVE 200-DAY LINES
TRANSPORTS AND UTILITIES ARE HOLDING MARKET BACK ... I've been writing about the continuing discrepancy between three Dow Averages. But things may be starting to improve. Chart 1 shows the Dow Industrials closing at a three-month high and just shy of its early March peak. [The S&P 500 ended at a record close]. All of this is good. Volume, however, didn't pick up much which shows a certain lack of enthusiasm. I've been suggesting that the industrials are being held back by much weaker action in transportation and utility stocks. Chart 2 shows the Dow Transports trading below its 200-day moving average and near the bottom of its 2015 trading range. Rising crude oil (black line) is a big reason why fuel-sensitive transports have been so weak. [A weaker dollar has also been part of the problem since it's supporting the price of oil]. Chart 2 shows the TRAN bouncing off its early April low. But it has to climb back above its moving average lines to improve its chart picture. It's hard to imagine the industrials climbing strongly without some help from the transports. Chart 3 shows an even weaker picture for the Dow Utilities which is also below its 200-day moving average. Weak utility performance is tied to a weak bond market (green line). The correlation between the two is pretty apparent. The good news there is that the UTIL is bouncing off its March low with some help from bonds (more on that shortly). A move above its April high is necessary, however, to signal a bottom. That would also help the rest of market, and rate sensitive stocks in particular.
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Chart 1
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Chart 2
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Chart 3
BOND SELLOFF MAY HAVE RUN ITS COURSE... The recent selling squall in global bonds may have run its course -- at least for now. Chart 4 shows the 10-Year Treasury Note Yield ($TNX) falling 9 basis points on Friday to put it back below its 200-day moving average (red line). The TNX is also back below its early March peak near 2.25%. The 14-day RSI line (below chart) is also backing off from overbought territory near 70. Bond yields in Europe and Japan also fell on Friday. The yield pullback improved the short-term picture for Treasury bonds. Chart 5 shows the 7-10 Year Treasury Bond iShares (IEF) bouncing off chart support at its March low and its 200-day moving average. That suggests that the worst may be over for now. Weak economic reports this week in retail sales and industrial production probably contributed to the bond bounce. That explains why utilities were Friday's strongest sector, and why rate-sensitive groups like homebuilders and REITs ended the week on an upnote. Those two groups are also bouncing off 200-day averages.
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Chart 4
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Chart 5
HOMEBUILDERS AND REITS BOUNCE... Chart 6 shows the Dow Jones REIT ETF (RWR) climbing nearly 1% on Friday and bouncing off its 200-day moving average. That's a very important test. Its 14-day RSI line (below chart) is also turning up from oversold territory near 30. REITs are big dividend payers and are hurt when bond yields rise. Friday's pullback in bond yields, and bounce in bond prices, may have saved the day for REITs. The same may be true of homebuilders. Chart 7 shows the Dow Jones US Home Construction iShares (ITB) also bouncing on Friday. Rising bond yields lead to higher mortgage rates which discourage home buying. Falling yields are better. The ITB has also been trading dangerously close to its 200-day average.
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Chart 6
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Chart 7
TELECOM ETF BOUNCES OFF 200-DAY LINE... Another rate-sensitive stock group that may be getting some bond relief in the nick of time is telecom. Chart 8 shows Telecom iShares (IYZ) bouncing off their 200-day line on Friday. Telecom stocks are also big dividend payers. Their April slide started when bond yields spiked. Friday's pullback in yields came just in time. Chart 9 shows SBA Communications (SBAC) also bouncing off its 200-day line. The reason I'm focusing so much on rate-sensitive groups is because they're the most vulnerable to rising rates, and have been one of the biggest drags on the stock market. It's hard to imagine the rest of the market showing much improvement as long as so many rate-sensitive groups are in danger of a major breakdown. This week's pullback in bond yields (if it continues), should help those groups stabilize and support the rest of the market. Rising Treasury prices may also lend some support to the dollar, which could weaken the price of oil. That would be good for the transports, which could also use some help.
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Chart 8
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Chart 9
DOW JONES COMPOSITE AVERAGE MAY BE BOTTOMING ... I'm ending today's message with another look at the Dow Jones Composite Average ($DJA) because I believe it may represent the truest picture of the current market situation which has been a sideways trading range since last December. The DJA includes all 65 stocks in the three Dow Averages -- 30 industrials, 20 transports, and 15 utilities. Last Saturday, I showed it bouncing off its 200-day moving average and climbing back over its 50-day line. After a midweek pullback, the DJA is back over the 50-day line (blue circle). Its MACD lines overlaid over the price bars also appears to be turning up. This week's price action is encouraging, and suggests that the worst may be over for the transports and utilities. This week's upside breakout in the Dow Industrials certainly helped. The DJA, however, needs to clear its April intra-day high at 6454 to turn its trend higher. Now that would be a bullish development.
