STRONG JOB REPORT PUSHES STOCKS AND BOND YIELDS HIGHER WITH FINANCIALS IN THE LEAD -- BANK, BROKER, AND INSURANCE ETFS STRENGHEN -- LEADERS INCLUDE BANK OF AMERICA, CHARLES SCHWAB, AND LINCOLN NATIONAL
STRONG JOB REPORT PUSHES BOND YIELDS HIGHER... An unusually strong July job report is causing more optimism in financial markets. When that happens, stock prices usually rise and bond prices fall which is what's happening today. When bond prices fall, bond yields jump which is also happening. Chart 1 shows the 10-Year Treasury Yield ($TNX) climbing six basis points (4%) to 1.56%. That's continuing the rebound in bond yields that started a month ago. My Wednesday message made a technical case for bond yields having hit bottom. I pointed out that rising rates would be bad for bond prices along with dividend paying groups like staples, utilities, telecom, and REITS. All four of those bond proxies are either in the red today (along with bonds) or underperforming. Rising rates, and a stronger dollar, are also causing profit-taking in gold which has been another recent safe haven. As I also pointed out a midweek, the biggest beneficiaries from rising rates are financial stocks. That explains why financials are the day's strongest group.
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Chart 1
FINANCIALS SPDR HITS EIGHT-MONTH HIGH ... The daily bars in Chart 2 show the Financial Select SPDR (XLF) breaking through its spring high to reach the highest level this year. Its relative strength ratio (top of chart) has been rising for a month and appears to be bottoming as well. Of all the sectors in the market, financials are the most sensitive to the direction of interest rates. Their upside breakout appears to reinforce the view that bond yields have bottomed, and that bond prices have peaked. The three financial groups that benefit the most from from rising yields are banks, brokers, and life insurers. Not surprisingly, those three groups are leading the XLF higher. [REITs, which are hurt by rising rates, are the day's weakest XLF performers].
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Chart 2
BROKER-DEALER ISHARES ALSO BREAK OUT... My Wednesday message showed the U.S. Broker-Dealers iShares (IAI) testing its early June high. Chart 3 shows the IAI breaking through that chart barrier today. That's a positive sign for the group and the rest of the market. That's because a strong performance by that group shows more optimism for the stock market. Chart 4 shows Charles Schwab (SCHW) gapping 4% higher today and clearing its moving average lines. It looks like it's also going to clear a falling trendline drawn over its December/June highs. Other brokerage gainers include Morgan Stanley (MS) and E Trade (EFTC). Banks are also having a strong day.
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Chart 3
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Chart 4
BANK SPDR HITS TWO-MONTH HIGH... Chart 5 shows the S&P Bank SPDR (KBE) climbing to the highest level in two months. Today's gain also pushes the KBE above its moving average lines. The KBE/SPX ratio (top of chart) continues to rise as well. Bank stocks are one of the biggest beneficiaries of rising bond yields because that boosts their net interest margin and allows them to charge higher rates for their loans. It also encourages banks to do more lending which is good for the economy. Chart 6 shows Bank of America (BAC) also clearing its 200-day average for the first time this year. Citigroup (C) is also having a strong day along with several other bank stocks.
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Chart 5
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Chart 6
LINCOLN NATIONAL LEADS INSURERS HIGHER... Insurance stocks also benefit from higher bond yields because most of their premiums are invested in fixed income markets. Higher yields mean higher income. Chart 7 shows the U.S. Insurance iShares (IAK) also rallying today. The IAK has been a leader among financial stocks. Several life insurers (like Metlife and Prudential) are rebounding today after taking a drubbing yesterday. One life insurer leading that group higher is Lincoln National (LNC). Chart 8 shows the stock clearing its 200-day line and nearing a test of its early June peak. Life insurer Unum (UNM) is also having a strong day. One of the reasons why this week's upturn in financial stocks is good for the market is their large size. Latest figures show that finance now accounts for nearly 16% of the S&P 500 which is second only to technology's 20%. Fortunately for the market, technology is also leading it higher.
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Chart 7
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Chart 8
NASDAQ COMPOSITE NEARS RECORD -- MICROSOFT IS ALREADY THERE ... The Nasdaq Composite Index is on the verge of joining the Dow and S&P 500 in record territory. Chart 9 shows the $COMPQ trading at the highest level in a year, and on the verge of clearing last July intra-day peak at 5232. The Nasdaq 100 (which includes the 100 largest non-financial stocks in the Nasdaq market) has already hit a new record, as has Technology SPDR (XLK). The Nasdaq and the technology sector are being led higher by big tech stocks that include Amazon.com, Alphabet (GOOGL), Cisco (CSCO), Facebook (FB) and Intel (INTC). The Nasdaq's biggest stock -- Apple (AAPL) -- has gained 13% since the start of July, has cleared its 200-day average, and is trading at a four-month high. The Nasdaq's second biggest stock is doing even better. Chart 10 show Microsoft (MSFT) hitting a new record high today to reaffirm its bullish breakout that took place during July. Its relative strength ratio (top of chart) is climbing as well. It's hard not to be positive on the stock market with big technology stocks like that leading it higher. Along with the financials.
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Chart 9
