JUMP IN 10-YEAR JAPANESE BOND YIELD MAY BE HINTING AT TREASURY YIELD BOTTOM -- BOND PRICES ARE STARTING TO WEAKEN -- SO ARE BOND PROXIES -- BANKS AND FINANCIALS STRENGTHEN
10-YEAR JAPANESE YIELD SURGES TO FOUR MONTH HIGH... Chart 1 show the 10-Year Japanese Bond yield surging over the last week to the highest level since March. That's the biggest weekly jump in recent memory. Last Friday's disappointing BOJ bond buying program followed by yesterday's disappointing fiscal stimulus program pushed Japanese bond yields sharply higher and bond prices lower. Why that matters is because Japanese yields have been leading global bond yields lower. This week, they appear to be doing the opposite. Sovereign bond yields have also climbed this week in Europe and the Americas. That may help explain why bond prices have been slipping in the U.S. along with dividend paying stocks that act as bond proxies -- like staples and utilities. This week's bounce in Treasury yields may also explain why bank and financial stocks are having a strong week.
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Chart 1
10-YEAR TREASURY YIELD IS IN SUPPORT AND OVERSOLD ... Over the last week while the JGB yield was jumping, the 10-year Treasury Yield climbed 10 basis points (7%) to 1.56%. What may be more important is where that bounce is starting from. The weekly bars in Chart 2 show the 10-Year T-Note Yield ($TNX) having bounced off its previous 2012 low near 1.40%. In addition, its 14-week RSI line (below chart) is bouncing from oversold territory at 30 for the second time since 2015. That at least suggests that Treasury yields might be scraping bottom. That's consistent with overbought readings in Treasury bond prices which trend in the opposite direction of yields.
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Chart 2
TREASURY BOND PRICES LOOK TOPPY... With Treasury yields rising, bond prices should be weakening. And they are. The daily bars in Chart 3 show the 20+Treasury Bond iShares (TLT) peaking in early July and nearing a test of its July low and 50-day average. Its 14-day RSI line is in danger of falling below 50; and its daily MACD lines (below chart) have turned down. That only reflects short-term selling. Its weekly bars, however, suggest that its major uptrend may be in jeopardy. The weekly bars in Chart 4 show the TLT still in an uptrend after recently hitting a record high. The 14-week RSI (red) line, however, has turned down after recording the most overbought reading (over 30) since early 2015. That's a warning of a possible bond top. So is the fact that weekly MACD lines (below chart) formed a "negative divergence" by not exceeding their 2015 top. That may not necessarily mean that bond prices are due for a big drop. It does, however, mean that they may be peaking with not much more upside potential. In addition to weaker bond prices, that would also reduce the recent appeal of dividend-paying stocks like staples, utilities, telecom, and REITs. Some of those stocks have already started to slip.
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Chart 3
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Chart 4
DIVIDEND PAYERS ARE STARTING TO UNDERPERFORM... Dividend-paying stocks like utilities, telecom, REITS, and staples have been this year's strongest sectors, thanks to falling bond yields and rising bond prices. Their relative strength lines in Chart 5, however, have been falling for utilities, telecom, and staples during July. The REIT relative strength line has flattened out. Three of them went from market leaders to market laggards over the last month. That's consistent with the view that bond prices may be peaking and bond yields hitting bottom. Money starting to move out of those overbought groups has to move somewhere. Some of it appears to be moving into financials, including banks. That would also be consistent with higher bond yields.
Chart 5
FINANCIAL SHARES STRENGTHEN ... Financial stocks had been the market's weakest sector during 2016, again thanks to low bond yields. Over the last month, however, financials have moved up in the sector rankings. Chart 6 shows Financials Sector SPDR (XLF) trading just shy of its May peak. Not only does the chart have a positive look to it, the moving average lines are in bullish alignment. The XLF/SPX relative strength ratio (gray line) turned up during July after falling throughout June, and is bouncing off its February low. Banks have been a part of that financial rebound. Chart 7 shows the S&P 500 Bank SPDR (KBE) struggling to climb above its moving average lines. Banks had been the weakest part of the XLF during the first half of the year. They've done better since July (when rates starting bouncing). The KBE still has a way to go to turn its trend higher. But it may have begun that process. The bounce in Japanese bond yields may be hinting at better days ahead for banks and other U.S. financial stocks. Brokers and insurers have stronger chart patterns than banks, and should also benefit from any rotation out of bond proxies. Chart 8 shows the U.S. Broker-Dealers & Securities Exchanges iShares (IAI) nearing its early June peak.
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Chart 6
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Chart 7
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Chart 8
OVERSOLD CRUDE OIL LOOKS FOR SUPPORT... The biggest drag on the stock market this month has been the drop in the price of crude oil and relative weakness in energy shares. That sector may finally get be getting some relief. The daily bars in Chart 9 show the United States Oil Fund (USO) bouncing off potential chart support formed in early April. In addition, its 14-day RSI line has reached oversold territory below 30 for the first time since January. The combination may provide some short covering or new buying. That's being reflected in stronger energy shares. The daily bars in Chart 10 show the Energy SPDR (XLE) rebounding off potential chart support near its June low. Despite its relatively weaker performance of late, the XLE has suffered very little chart damage. It's actually the day's strongest sector. That should relieve some pressure on the stock market which has been in a short-term pullback. Another positive sign for the stock market is that three of its strongest sectors over the last month carry the most weight in the S&P 500. They include technology (20% of the SPX), healthcare (15%), and financials (14%). Energy carries a smaller 7% weight.
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Chart 9
