AUTO PARTS AND RAILS LEAD MARKET LOWER -- BORGWARNER HITS THREE-YEAR LOW -- CSX AND UAL LEAD TRANSPORTS LOWER -- TREASURIES CONTINUE TO GAIN AS STOCKS SINK -- FALLING YIELDS, HOWEVER, ARE HURTING BANKS -- S&P 500 NEARS TEST OF 2015 LOW
AUTO PARTS LEAD CYCLICALS LOWER... A week ago Tuesday (January 5), I showed a chart of General Motors falling below its 200-day moving while autos were leading the Consumer Discretionary SPDR lower. Today, the main drag on that sector is auto parts. Chart 1 shows the Dow Jones US Auto Parts Index ($DJUSAT) falling to the lowest level in more than two years. Its relative strength line (top of chart) looks even worse. BorgWarner (BWA) is the worst performer in the group, and the second weakest stock in the S&P 500. The red line below Chart 1 shows that stock plunging to a three-year low. Delphi Automotive (DLPH) is another big loser. Autos are having a bad day as well. Chart 2 shows Ford Motor (F) down more than 4% and trading at the lowest closing price in nearly three years. As I suggested last week, loss of confidence in the auto industry is a negative sign for the economy and the stock market. Cyclicals are the day's weakest sector. A weakening auto industry is a big reason why.
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Chart 1
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Chart 2
RAILS LEAD INDUSTRIALS AND TRANSPORTS LOWER ... My weekend message showed the Dow Transports having lost -25% of their value and in a bear market. Transports are down another -3% today. Falling transports are also helping make the Industrials Select SPDR (XLI) one of the day's weakest sectors. Chart 3 shows the XLI in a downtrend and heading for a test of its late September low. Its two biggest losers are rails and airlines. Chart 5 shows CSX tumbling more than 6% to a nearly three year low. [Norfolk Southern (NSC) is also down nearly -6%]. United Continental (UAL) is the weakest airline. Chart 5 shows UAL falling -4% to new 52-week low. That's not a good sign for the economy or stock market either.
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Chart 3
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Chart 4
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Chart 5
TREASURIES CONTINUE TO GAIN GROUND ... With stocks dropping, money continues to flow into the ultimate safe haven of Treasury bonds. Chart 6 shows the Barclays 7-10 Year Treasury Bond iShares (IEF) rising to a new three month high. That's good for bond proxies like utilities and REITS which are holding up better than the rest of the market. It's also helping support defensive consumer staples, many of which also pay dividends and which usually do better when bonds are outperforming stocks. Rising bond prices, however, mean falling bond yields. The green bars at the bottom of Chart 6 shows the 10-Year Treasury Note Yield ($TNX) falling to the lowest level since October. Falling bond yields are bad for banks. And recent action shows that.
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Chart 6
FALLING BOND YIELDS HURT BANK PERFORMANCE... Previous messages have explained that rising bond yields are good for certain financial stocks like banks. That's because they can charge more for their loans. The opposite is true of falling bond yields. That's bad for banks because the cost of loans drop (as does net interest margin). The daily bars in Chart 7 show the KBW Bank SPDR (KBE) bearing down on its August intra-day low. The red line below the chart shows the KBE/SPX relative strength ratio falling to the lowest level since last spring. That a negative combination of weak absolute and relative performance. And another negative for the stock market.
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Chart 7
S&P 500 HEADING TOWARD TEST OF 2015 LOWS... My weekend message expressed the view that the major U.S. stock indexes were likely headed for a test of 2015 lows. That test is getting a lot closer. The daily bars in Chart 8 show the S&P 500 losing more than 1% and bearing down on its late September/ mid-August intra-day lows. That's a very important test. A decisive violation of those lows would signal a much deeper correction. The Russell 2000 Small Cap Index has already fallen to a more than two-year low, and is now in bear market territory with a loss of more than -20%. That's not an encouraging sign for the large cap SPX. I continue to believe that the current market condition is the riskiest since the bull market started in 2009.
