RISING BOND YIELDS BOOST INVESTMENT SERVICE STOCKS AND LIFE INSURERS -- E*TRADE ACHIEVES BULLISH BREAKOUT -- AMERITRADE MAY BE NEXT -- PRUDENTIAL ALSO BREAKS OUT AS METLIFE CLEARS 200-DAY LINE -- STAPLES AND UTILITIES ARE OVERSOLD
TREASURY YIELDS CONTINUE TO CLIMB... I've been writing about the upturn in global bond yields, which has boosted Treasury bond yields. Chart 1 shows the 10-Year Treasury Yield trading above 1.70% in today's trading. Foreign yields are bouncing as well. One of the side-effects of rising bond yields is the recent rotation out of bond proxies like staples, telecom, telecom, and REITs and into financials like banks, brokers, and life insurers. My main focus has been on bank stocks that usually benefit from higher bond yields. Over the last month, however, the two strongest financial groups have been life insurers and investment service stocks. And both are doing very well today.
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Chart 1
INVESTMENT SERVICE STOCKS SHOW NEW LEADERSHIP ... Financial stocks have been market underperformers throughout the seven year bull market in stocks. That's most likely due to the fact the Treasury yields have fallen throughout that period. Since the start of the third quarter, however, financial stocks have started to come alive -- both on an absolute and relative basis. That new interest in financials has also coincided with rising bond yields. The main financial groups are banks, brokers, and insurers. All three have turned up since July and are showing rising relative strength ratios. Along with stronger chart patterns. Chart 2 shows the Dow Jones Investment Services Index ($DJUSSB) trading at the highest level this year. Its price trend shows a bullish pattern of "rising peaks and rising troughs" since February, as well as having cleared a major resistance line extending back to last July. Its 50-day average has also climbed above its 200-day. And its relative strength ratio (top of chart) is rising. Investment service stocks have been the strongest part of the financial sector since midyear. That could be interpreted as a new sign of optimism in the stock market. I'm more inclined to view it as a sign that bond yields have probably bottomed.
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Chart 2
E*TRADE AND TD AMERITRADE ARE BREAKING OUT... Several investment service stocks are having an impressive chart day. Chart 3 shows E Trade Financial (ETFC) breaking through its early June high to turn its trend higher. Chart 4 shows TD Ameritrade (AMTD) on the verge of doing the same. So is Charles Schwab (not shown). For whatever the reason, it seems clear that money is moving into this group in a big way. Life insurers are also having a strong chart day.
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Chart 3
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Chart 4
LIFE INSURERS ARE ALSO BREAKING OUT... Life insurers have been second strongest financial group over the last month. Chart 5 shows the Dow Jones Life Insurance Index ($DJUSIL) on the verge of breaking through its late May peak, after having cleared a yearlong falling trendline. Its relative strength ratio (top of chart) has also bottomed. Life insurers are beneficiaries of rising bond yields because that's where most of their premiums are invested. Higher yields translate into higher premium income. Individual life insurers also have strong looking chart patterns.
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Chart 5
PRUDENTIAL BREAKS OUT -- METLIFE CLEARS 200-DAY LINE... My September 8 message showed Lincoln National (LNC) clearing its summer high. I suggested that Prudential Financial (PRU) might be next. Chart 6 shows PRU clearing its May peak to signal a new uptrend. Its moving average lines are also bullish. Chart 7 shows Metlife (MET) having cleared its 200-day moving average. Unum Group (not shown) is also nearing its spring high.
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Chart 6
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Chart 7
STAPLES AND UTILITIES ARE OVERSOLD... Two of the biggest casualties of rising bond yields have been dividend-paying stocks like consumer staples and utilities. Both groups, however, are near chart support and oversold. The daily bars in Chart 8 show the Consumer Staples SPDR (XLP) trying to bounce off chart support along its late June low and its 200-day average. Its 14-day RSI (top of chart) has reached oversold territory at 30. A rebound could take some pressure off the stock market. So could a bounce in utilities. Chart 9 shows the Utilities Sector SPDR (XLU) in a similar oversold condition with a "positive divergence" visible on its RSI line. That also suggests that the recent selloff has been overdone. That may also provide some market relief.
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Chart 8
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Chart 9
FINANCIALS/UTILITY RATIO TESTS RESISTANCE... A tug-of-war is taking place between rising financial stocks and falling utilities. And it's reached a critical point. The black line in Chart 10 is a ratio of the Financials SPDR (XLF) divided by the Utilities SPDR (XLU). The ratio closely tracks the direction of the 10-Year T-Yield (green line). That makes sense. Falling yields favor utilities over financials (a falling ratio). Rising yields since July have favored financials over utilities (rising ratio). The ratio has run into resistance at its April peak. What it does from here will help determine which of those rate-sensitive group will emerge as market leaders. The direction of the financials/utilities ratio may also tell us something about the future direction of bond yields.
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Chart 10
OVERSOLD SPX FINDING SUPPORT AT JUNE PEAK... The daily bars in Chart 11 show the S&P 500 rebounding off its initial line of support along its June peak. That's why the flat line drawn over that earlier peak turned from red to green. Previous peaks should provide support on subsequent pullbacks. Also helping stocks is the fact that the 14-day RSI line (top of chart) has reached the same oversold level that it did during the June Brexit selloff. All ten sectors are in the black today. Top gainers are energy and technology. Daily MACD lines (below chart) are still, however, trending lower. They'll have to turn positive to support any serious rally attempt. Recent buying of financials shares may carry a mixed message. It's supportive for stocks over the short run. But it may not be over the long run if it's signalling higher bond yields.
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Chart 11
APPLE TAKES OFF... I'd be remiss if I didn't include a chart of Apple. And it's a good one. The daily bars in Chart 12 show Apple (AAPL) surging to a new nine-month high. It has decisively cleared its April peak. Moving average lines have also turned positive (blue circle). And its relative strength line (top of chart) has turned up. That's certainly bullish action by the market's biggest stock. It's leading the Nasdaq market higher as well as the Dow. That's also injecting more optimism into today's stock trading.
