FED'S HAWKISH TONE BOOSTS BOND YIELDS -- THAT HELPS BANKS AND INSURERS, BUT HURTS UTILITIES -- DOLLAR RALLY HURTS GOLD -- ENERGY STOCKS REBOUND WITH CRUDE OIL -- S&P 500 HITS TWO-MONTH HIGH -- SMALL CAPS ACHIEVE BULLISH BREAKOUT
BOND YIELDS RISE ... Today's Fed statement had a slightly more hawkish tone than markets were expecting, and left the door open for a possible December rate hike. After a brief dip, stocks ended strong. Financials bounced sharply on the Fed statement, while rate-sensitive utilities sold off. A bounce in the dollar also caused profit-taking in the price of gold. Crude oil, however, still had a strong day, as did energy stocks. Small caps jumped to a new two-month high to broaden out the stock rally. Chart 1 shows the 10-Year T-Note Yield ($TNX) climbing after the Fed statement.
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Chart 1
FINANCIALS CLEAR 200-DAY LINE... Financial stocks had the strongest response to today's Fed announcement. Chart 2 shows the Financial SPDR (XLF) moving further above its 200-day moving average. Its relative strength line (above chart) is starting to climb as well. Notice the close correlation between the XLF/SPX ratio and the 10-Year Treasury Yield (green line). In other words, they generally trend in the same direction. Financials stocks as a group usually benefit from higher bond yields. Banks benefit by charging higher rates for their loans. Higher bond yields boost income generated in insurer portfolios. Those two groups were among today's biggest gainers.
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Chart 2
BANKS UP, UTILITIES DOWN ... Banks had a strong day, while utilities were sold. That's the result of the jump in bond yields. Chart 3 shows the KBW Bank SPDR (KBE) jumping more than 3% to the highest level in two months. By contrast, Chart 4 shows the Utilities SPDR (XLU) falling sharply. Utilities are closely tied to the price of Treasury bonds, which fell today. Rate sensitive REITs are also experiencing profit-taking for the same reason. Dividend paying stocks usually suffer when bond yields rise. That also explains some selling in consumer staples today.
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Chart 3
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Chart 4
DOLLAR JUMP HURTS GOLD... Another side-effect of the Fed's hawkish tone was a jump in the U.S. dollar. Chart 5 shows the PowerShares Dollar Bullish ETF (UUP) jumping above its 200-day average to the highest level in two months. [The dollar is also being supported by a weaker Euro on expectation for more ECB easing]. As usually happens, the rising dollar had a negative impact on the price of gold. Chart 6 shows the Gold Trust SPDR (GLD) reversing sharply lower right at its 200-day moving average. The price of oil, however, had a strong day.
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Chart 5
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Chart 6
CRUDE OIL JUMPS SHARPLY... Even in the face of a bouncing dollar, crude oil had a strong day. Chart 7 shows the United States Oil Fund (USO) bouncing more than 6% today (and in heavy trading). The USO remains above its August low, which keeps hopes for a bottom alive. Energy stocks also had a strong day. Chart 8 shows the Energy SPDR (XLE) bouncing 2% off its 50-day average. That also keeps the XLE above its September peak, and its two-month uptrend intact. The May slide in the XLE helped start the topping process that led to this summer's stock market correction. A potential bottom in the XLE could help reverse that negative trend.
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Chart 7
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Chart 8
S&P 500 BOUNCES OFF 200-DAY LINE AS SMALL CAPS TURN UP ... After a brief afternoon dip on the Fed statement, stocks recovered their early gains and more. Chart 9 shows the S&P 500 hitting a new two-month high after holding support at its 200-day average. [It's a good sign when a broken moving average line starts providing support]. Some writers have expressed concern about the lack of "market breadth" during the October rally. That's been due largely to lagging action in small and midcap stocks. That situation has taken a turn for the better. Chart 10 shows the S&P 600 Small Cap Index ($SML) breaking out to a new two-month high. [The Russell 2000 Small Cap Index and the S&P 400 Mid Cap Index did the same]. That broadening out of the October rally to small and midsize stocks should relieve concerns about this being just a large cap rally.
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Chart 9
