INDUSTRIAL SPDR NEARS NEW RECORD -- RAILS ARE BACK ON TRACK LED BY CSX AND UNION PACIFIC -- COMMODITY INDEXES REACH BULL MARKET THRESHOLD -- MATERIALS ALSO SHOW MARKET LEADERSHIP -- NUCOR LEADS STEEL STOCKS HIGHER -- FALLING BOND YIELDS HELP GOLD
INDUSTRIAL SPDR NEARS RECORD ... One of the positive signs for the stock market is that it's being led higher by economically sensitive stock groups. Chart 1, for example, shows the Industrial Sector SPDR (XLI) testing its April high. The XLI scored a bullish breakout during March when it exceeded its November high (green circle). Even more impressive was the sharp upturn in the XLI/SPX ratio that took place in early February. I interpreted that at the time as a positive sign or the XLI and the rest of the market. Chart 1 also shows the XLI trading slightly above its early 2015 intra-day high (56.73). And, of course its moving averages are positive. One of the things that makes the XLI so economically-sensitive is that it includes both industrial and transportation stocks. And it just so happens that railroads are leading it higher today.
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Chart 1
RAIL INDEX RIDES COMMODITY RALLY... Rails are the biggest gainers in the XLI today. [They're also leading transports higher]. Chart 2 shows the Dow Jones US Railroad Index ($DJUSRR) climbing nearly 2% after bouncing off its moving average lines. Its relative strength ratio (top of chart) appears to have bottomed. That's usually a good sign for the economy and the stock market. Improving rail traffic suggests stronger demand for goods which are shipped by rail, including commodities. Chart 2 shows a strong correlation over the last year between rail stocks and the Reuters/Jefferies CRB Commodity Index (solid area). After falling together during 2015, both bottomed together at the start of 2016 (see circle). And have been rallying together since then.
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Chart 2
CSX AND UNION PACIFIC UPTRENDS ARE ON TRACK... Chart 3 shows CSX climbing nearly 2% today after clearing its moving average lines. Its relative strength ratio (top of chart) is also showing upside leadership. Chart 4 shows Union Pacific (UNP) already testing its April high. Both rail stocks appear to be have bottomed. Norfolk Southern (not shown here) is also having a strong day. Four of the top gainers in the Dow Jones Transportation Average today are rail stocks.
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Chart 3
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Chart 4
COMMODITY PRICES IN BULL MARKET... Chart 5 shows the PowerShares Commodity Index Tracking Fund (DBC) jumping to a new eight-month high today. The CRB Index (not shown) has done the same. Both commodity indexes have also gained more than 20% this year which qualifies as the start of a new bull market. The blue 50-day line has crossed over the red 200-day line which is another bullish sign. Today's commodity gains are taking place across the entire spectrum -- agriculturals, base metals, energy, and precious metals. Rising commodity prices are pushing energy and mining stocks higher around the world. Silver and steel stocks are especially strong today. A weaker dollar is the main driver behind the commodity rally. The green line in top of Chart 5 shows the Dollar Index falling since late January when commodities bottomed.
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Chart 5
MATERIALS ARE ALSO MARKET LEADERS... Stocks tied to commodities have also become market leaders. Chart 6 shows the Materials Sector SPDR (XLB) reaching the highest level since last June. The XLB cleared its fourth quarter high in April to turn its trend higher. The XLB/SPX ratio (top of chart) has been showing market leadership since late January. Most of that is due to the upturn in commodity prices. Three of today's top gainers are Freeport McMoran (copper), Newmont Mining (gold), and Nucor (steel). Steel stocks are having an especially strong day.
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Chart 6
NUCOR LEADS STEEL GROUP HIGHER... Chart 7 shows the VanEck Vectors Steel ETF (SLX) jumping 4% today after rising back above its 50-day average. The SLX appears to be resuming the uptrend that started in January. Its moving average lines are also bullish. The SLX/SPX ratio (top of chart) is also in an uptrend. Nucor is a big reason why. Chart 8 shows Nucor (NUE) surging to the highest level since the end of 2014. Its relative strength line is doing the same.
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Chart 7
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Chart 8
FALLING BOND YIELDS HELP GOLD... The falling dollar is usually cited as the reason why commodity prices are rising. In the case of gold, another contributing factor is the continuing drop in bond yields. Chart 9 shows the inverse correlation between the price of gold (orange line) and the 10-Year Treasury yield (green line) over the last year. Gold prices soared in January and February as yields plunged. This past week's drop in bond yields (following last Friday's weak job report) is also helping push gold prices higher. [Lower Treasury yields are also contributing to a weaker dollar]. Gold is a non-yielding asset and benefits when bond yields are falling. Treasury yields are also being pulled down by record lows in German and UK yields. Gold gained $16 dollars today (1.4%) as the dollar and Treasury yields dipped. Silver gained 3.8% which accounts for the big gain in silver miners.
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Chart 9
HOMEBUILDERS BREAK OUT... Homebuilders are another group that may be benefiting from lower bond yields (which translate into lower mortgage rates). Chart 10 shows the U.S. Home Construction iShares (ITB) breaking out to the highest level since last December. The ITB has also risen above a falling trendline drawn over its August/December highs. That's a bullish combination of absolute and relative strength. The ITB/SPX ratio (top of chart) bottomed in February. PulteGroup (PHM) has risen to a eight-month high and is a group leader. DR Horton (DHI) and Lennar (LEN) are also showing leadership qualities.
