BOND YIELDS PLUNGE ON WEAK JOBS REPORT -- BANKS, BROKERS, AND INSURERS LEAD FINANCIALS LOWER -- WEAKER DOLLAR HELPS BOOST GOLD AND GOLD MINERS -- STOCK INDEXES CONTINUE TO TEST SUPPORT LEVELS
BOND YIELD PLUNGES... This morning's dismal jobs report pushed Treasury prices sharply higher and bond yields lower. Chart 1 shows the 10-Year Treasury Note Yield plunging to the lowest level since August. Treasury bond prices saw the biggest gains, while investment grade corporate bonds also bounced. High yield bonds, which are highly correlated to stocks, are falling. Financial stocks that rely on higher rates are being hit especially hard. That includes banks, brokers, and insurance stocks. Stocks that benefit from lower rates, like REITs and utilities, are holding up better. Gold shares are also having a strong day on the back of a strong commodity. That's being helped by lower rates and a weaker dollar. Stocks also opened lower on the jobs report.
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Chart 1
BANKS FALL WITH BOND YIELDS... Bank stocks are highly correlated to the direction of bond yields. Rising bond yields allow banks to charge more for their loans (while paying less to depositors). Falling bond yields hurt their earnings, and their stock performance. Like today. The daily bars in Chart 2 show the KBW Regional Banking SPDR (KRE) falling -4% today to the lowest level in a month (and on rising volume). The KRE recently met selling near its 200-day moving average. The green line on top of Chart is the 10-Year T-Note yield. The two markets usually trend together. [The 60-day Correlation Coefficient shows a positive correlation of .71% between the two]. That explains why banks did much better during the first half of the year when bond yields were rising. Falling bond yields since midyear have hurt banks. Brokers and insurers are being hurt for the same reason, which explains why financials are the day's weakest sector. Dividend-paying REITs, which benefit from lower bond yields, are holding up much better (as are utilities).
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Chart 2
GOLD STOCKS JUMP WITH COMMODITY... Gold and gold miners also benefit from falling bond yields. Gold is a non-yielding asset. As a result, its appeal increases when bond yields fall. That's especially true if the dollar is dropping as well (more on that shortly). Gold may also be benefiting from increased tensions in the Mideast. The daily bars in Chart 3 show the Gold SPDR (GLD) jumping the equivalent of $23 dollars today (+2.2%). Gold is recovering from a five-year low, and has a long way to go to reverse its major downtrend. The same is true of gold miners. Chart 4 shows the Market Vectors Gold Miners ETF (GDX) climbing 6% today, making it the market's strongest group. The GDX is moving above its 50-day average for the first time in five months. The GDX has been scraping bottom since August after falling to the lowest level in fifteen years. The fact that the group is so historically cheap may be attracting some attention. A weaker dollar is also helping.
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Chart 3
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Chart 4
DOLLAR FALLS ON PLUNGE IN YIELDS... The plunge in bond yields following the bad jobs report is also pushing the U.S. dollar lower. Chart 5 shows the PowerShares Dollar Bullish ETF (UUP) gapping lower today. It also remains below its moving average lines. Most foreign currencies are higher, with the biggest gains in the Euro and yen. A falling dollar is usually beneficial to gold and gold miners. So is a weaker stock market as we enter the volatile month of October.
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Chart 5
TESTING PROCESS CONTINUES... The stock market continues to test underlying support levels formed during the summer. Chart 6 shows the Dow Industrials holding chart support along the 16,000 level. Chart 7 shows the Nasdaq Composite holding support along its August 25 closing low at 4500. Chart 8 shows the S&P 500 testing its August intra-day low. The testing process is likely to continue well into the month of October. So far, those support levels are holding. However, all three stock indexes remain below their mid-September peak and falling 50-day averages. Sooner or later, those levels will have to be exceeded if the market trend is going to improve.
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Chart 6
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Chart 7
