STOCKS ARE ENDING THE WEEK ON A DOWN NOTE -- ENERGY SECTOR SPDR TESTS SUMMER LOW -- MONEY FLOWS INTO TREASURIES AS CORPORATE BONDS UNDERPERFORM -- TREASURIES ARE HAVING A BETTER DECEMBER THAN STOCKS
MAJOR STOCK INDEXES UNDER HEAVY SELLING... Stocks have come under renewed selling pressure following Wednesday's Fed inspired bounce. And it looks like they're going to end the week on the downside. Chart 1 shows the Dow Industrials down nearly 200 points in late morning trading. It's also back below its moving average lines. Chart 2 shows the S&P 500 in a similar situation. Chart 3 shows the Nasdaq Composite in danger of falling below its 200-day as well. Notice that all of their daily MACD lines (below charts) have remained in negative territory throughout the recent rebound. That's a negative sign. All ten market sectors on in the red. Energy shares are testing their summer lows as crude oil tests its 2009 low.
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Chart 1
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Chart 2
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Chart 3
ENERGY SPDR TESTS SUMMER LOWS... The drop in crude to another six-year low this week has caused energy shares to weaken (along with other commodity-related stocks) and is one of the reasons the market is weakening. Chart 4 shows the Energy SPDR (XLE) in the process of testing its August/September lows. That's an important test for it and the rest of the market. At the same time, WTIC crude is nearing its 2009 closing low at $33.98. The strong dollar on Thursday (resulting from the Fed move on Wednesday) increased downside pressure on commodities.
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Chart 4
TREASURIES OUTPACE CORPORATE BONDS ... With stocks and commodities on the defensive, some money is flowing into longer-dated Treasury bonds. Chart 5 shows the Barclays 20+ Year Treasury Bond iShares (TLT) climbing during the week. The Fed move boosted short-term yields, but longer-dated bond yields have dropped. That's partly due to the wide premium of Treasury bonds over European yields which increases the demand for Treasuries. Corporate bonds haven't fared as well. Chart 6 shows the iBoxx Investment Grade Corporate Bond iShares (LQD) acting much weaker than Treasuries since the start of December. That's sign of caution among fixed income investors. The worst bond class remains high yield. Chart 7 shows the iBoxx High Yield Corporate Bond iShares (HYG) trading lower today. That has a lot to do with selling in energy and miners. But that's another caution sign.
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Chart 5
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Chart 6
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Chart 7
BOND/STOCK RATIO STILL RISING... Last Saturday's message showed that Treasury bonds have been doing better than stocks since the summer. That's still the case. Chart 8 shows a ratio of the the long-dated Treasury ETF (TLT) divided by the S&P 500 SPDRs (SPY). The rising ratio shows Treasury bonds outperforming stocks during December. The chart also shows that long-dated Treasuries have done better than stocks since mid-year. Part of the reason for the bond buying is growing fear of global deflation, which usually favors bonds over stocks. Treasury yields are also higher than other developed markets, which makes U.S. long-dated bonds more attractive to foreign buyers. A stronger dollar also makes U.S bonds more attractive to foreigners.
