LOW BOND YIELDS CONTINUE TO BENEFIT DIVIDEND-PAYERS -- THAT INCLUDES STAPLES, REITS, UTILITIES, AND TELECOM -- DIVIDEND ISHARES TEST FOURTH QUARTER HIGH -- STAPLE AND UTILITY SPDRS HIT NEW HIGHS -- REITS AND TELECOM ETFS SHOW RELATIVE STRENGTH
BOND YIELDS ARE STILL LOW... I recently showed the 10-Year Treasury Bond Yield ($TNX) bouncing off an "island reversal" bottom formed a couple of weeks ago (see circle), and pointed out that pattern usually signals a "short-term" change in direction. Chart 1 shows the TNX moving back down to retest that previous low after a modest bounce. Low bond yield provide good news for some stocks groups, and bad news for others. Falling bond yields have contributed to this year's selling in bank shares (as have falling oil and energy shares). It has also hurt life insurers which depend on the bond market to generate income in their portfolios. But it helps stocks that pay dividends which include obvious groups like utilities, telecom, and REITs. It also benefits consumer staple stocks that pay dividends. Another reason why falling bond yields help those groups is because they're also defensive in nature. With stocks under pressure this year, investors have bought Treasury bonds which pushes yields lower. Investors usually favor defensive stocks in that environment.
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Chart 1
DJ DIVIDEND ISHARES TEST RESISTANCE... Chart 2 shows the DJ Dividend iShares (DVY) in the process of testing its early November closing high near 77. It's also trading well above its moving average lines. The DVY/SPX ratio (top of chart) has been rising since December which reflects the strong relative performance of the ETF. One of the reasons for its strong performance is that its biggest holdings are utilities (35%) which have been unusually strong of late. Utility prices usually track rising bond prices very closely. The second biggest group, however, are consumer staples which account for 12% of the DVY. That defensive group has been strong as well. Several of my recent messages have shown a lot of uptrends in food stocks, which have helped lead the staples group higher. That trend is continuing. Telecom stocks are also included.
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Chart 2
STAPLES AND UTILITIES CONTINUE TO CLIMB... Chart 3 shows the Utilities SPDR (XLU) hitting a new high today. Utilities are rising along with Treasury bond prices. At the same time, Chart 4 shows the Consumer Staples SPDR (XLP) touching a new high today. That's a sign that investors are still reaching for yield as well as some defensive protection. Telecom and REITs are also benefitting from rising bond prices and lower yields.
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Chart 3
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Chart 4
REITS AND TELECOM ALSO ATTRACT NEW INTEREST... Chart 5 shows the streetTRACKS Dow Jones REIT Fund (RWR) bouncing sharply over the last week as bond yields have retreated. That might not look that impressive. But the rising RWR/SPX ratio (top of chart) does. It shows that REITs have been outperforming the market since last June. REITs pay out most of their profits in the form of dividends. That makes them more attractive in a climate of low bond yields. Chart 6 shows Telecom iShares (IYZ) trading at a two-month and challenging their 200-day line. Even more impressive is the IYZ/SPX ratio on top of Chart 6. That relative strength ratio turned up in January and has reached the highest level since last spring. Recent messages have shown upside breakouts in AT&T (T) and Verizon (VZ) which are the biggest holdings in the IYZ.
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Chart 5
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Chart 6
CENTURYLINK AND FRONTIER JUMP... Here are two other telecom stocks that are showing good absolute and relative strength. Chart 7 shows CenturyLink (CTL) surging to the highest level in eight months. Its relative strength line (top of chart) has surged as well. CTL is the third biggest holding in the IYZ. Chart 8 shows Frontier Communications (FTR) surging this week as well. So has its relative strength line. That suggests that buying in the telecom space is broadening out.
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Chart 7
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Chart 8
GENERAL MILLS HITS NEW HIGH... I've shown a list of food stocks that have hit highs over the past few months which include Campbell Soup (CPB), Hormel Foods (HRL), and Tyson Foods (TSN). Here's another one to add to the list. Chart 9 shows General Mills (GIS) breaking out to a new record high today. Its relative strength line has been rising since November. Five food stocks are today's biggest gainers in the XLP. General Mills is one of them.
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Chart 9
FALLING BOND YIELDS HURT BANKS ... I mentioned earlier that falling bond yields hurt banks. Here's the reason why. The green line in Chart 10 plots the 10-Year Treasury Yield ($TNX). The red line is a relative strength ratio of the KBW Bank Index ($BKX) divided by the S&P 500. [I'm using relative performance for banks because I believe that's a more accurate way to determine their underlying strength or weakness]. The main point of Chart 10 is that the two lines usually trend together. They rose together during 2013 and turned down together the following year. After an early 2015 bounce, both lines peaked in mid-July of last year and have been falling together since then. The sharp drop in bank relative performance this year coincided with a sharp drop in bond yields. Falling bond yields hurt bank net interest margin which is the difference between what they pay depositors and what they charge for loans. [The yield curve, which plots the difference between short and long term rates, has fallen to the lowest level in four years. That also hurts bank profitability]. The BKX/SPX ratio (red line) has fallen to the lowest level since 2011, and bank stocks have been the year's weakest group. Falling oil prices and a weak stock market have been contributing factors. Two things that would help banks here are a higher oil price and a rebound in bond yields. And, of course, a more stable stock market.
