YIELDS RISE ON YELLEN OPTIMISM -- THAT PUSHED DOLLAR HIGHER AND GOLD AND OTHER COMMODITIES LOWER -- OVERBOUGHT STOCKS ARE TESTING OLD HIGHS AND MAY NEED A BREATHER -- FOREIGN STOCKS ALSO EXPERIENCE SELLING NEAR RESISTANCE LINES
YELLEN PUSHES YIELDS HIGHER... Janet Yellen sounded a hawkish tone again today about the possibility of a December rate hike. That pushed U.S. rates higher. Chart 1 shows the 10-Year Treasury Note Yield climbing to the highest level in two months. Shorter-term rates climbed even more. That caused selling in bond prices. As happened last week when Ms. Yellen sounded a similar warning, rising U.S. yields pushed the dollar higher.
(click to view a live version of this chart)
Chart 1
DOLLAR CLIMBS... Chart 2 shows the PowerShares Dollar Bullish Fund (UUP) rising today to the highest level in three months. It rose against all other major currencies. Not only are U.S. rates rising, but the gap between U.S. and foreign rates is widening (especially in Europe) . That's bullish for the dollar. As usually happens when the dollar jumps, commodities sold off.
(click to view a live version of this chart)
Chart 2
GOLD CONTINUES TO TUMBLE... The rising dollar pushed commodity prices lower today. Chart 3 shows the Gold Trust (GLD) falling to the lowest level in two months. The slide in the price of gold started last Wednesday from its 200-day moving average after Ms. Yellen issued a similar hawkish warning. Gold also suffers when interest rates are rising. Energy prices sold off today along with their respective shares. Selling in commodity shares caused profit-taking in an overbought stock market. It also caused profit-taking in foreign shares tied to commodity prices.
(click to view a live version of this chart)
Chart 3
S&P 500 SPDRS DUE FOR A BREATHER ... The stock market has come a long way from its August bottom and may be due for a breather. The daily bars in Chart 4 show the S&P 500 SPDRS (SPY) trading up against previous peaks formed during May, June, and July in the 211-212 region. That's a logical chart spot for some profit-taking to appear. In addition, its 14-day RSI line (top of chart) has touched overbought territory at 70. That combination usually leads to a short-term pullback or consolidation. Initial chart support is likely at its rising 200-day average (red line). The overall trend, however, for stocks remains higher. A rising dollar hurts foreign earnings of large multi-national stocks in the U.S. It also hurts foreign stocks that produce commodities.
(click to view a live version of this chart)
Chart 4
FOREIGN STOCKS BACK OFF FROM RESISTANCE ... Foreign stock ETFs also saw afternoon selling, especially in commodity producers. Chart 5 shows the Vanguard FTSE All World ex-US ETF (VEU) backing off from falling resistance line extending back to May. It's also meeting resistance at its July low near 46. Those are logical spots to expect some profit-taking. The VEU includes foreign developed markets (including Canada) and has a 25% weight in emerging markets. Brazil and Russia were among today's biggest losers on weaker commodity prices. Although the VEU has underperformed U.S. stocks this year, the two are highly correlated. That means that any profit-taking overseas usually leads to profit-taking here.
