FINANCIALS LEAD FRIDAY STOCK BOUNCE -- DEUTSCHE BANK LEADS EUROPEAN BANKS HIGHER -- BANK OF AMERICA AND CITIGROUP LEAD US BANKS -- TRANSPORTS ARE ON THE VERGE OF BULLISH BREAKOUT -- RAILS LIKE UNION PACIFIC AND CSX HAVE ALREADY TURNED UP
DEUTCHE BANK BOUNCE SUPPORTS BANK STOCKS... In a reversal from yesterday, financial stocks are leading a Friday bounce in global stock markets. And, like yesterday, European banks are a big reason why. Concerns about contagion from Deutche Bank weakened bank shares yesterday. The daily bars in Chart 1, however, show U.S. listed Deutsche Bank (DB) shares climbing 14% today after climactic selling yesterday. European banks like Credit Suisse (CS) and UBS are up 6% and 4% respectively. That's giving a boost to U.S. banks and financial shares which are leading today's stock rebound.
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Chart 1
FINANCIAL SECTOR LEADS MARKET HIGHER ... Buying in European stocks, and a rebound in Treasury yields, are supporting financial stocks today. Chart 2 shows the Financial Sector SPDR (XLF) trying to regain its 50-day average. Its uptrend remains intact. The XLF/SPX ratio (top of chart) recently backed off from its May peak and is rebounding again. A close above its August high would reflect a big vote of confidence in financial shares. It would probably take another uptick in bond yields for that to happen. This week's jump in crude oil may help that along. Banks, brokers, and life insurers are leading the XLF higher. That's another hint at higher rates.
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Chart 2
BANK ETF STILL LOOKS STRONG... U.S. banks are leading the financial sector higher today. Chart 3 shows the S&P Bank SPDR (KBE) bouncing off its 50-day average (blue line). The KBE recently cleared its spring high to establish a new uptrend. Its relative strength ratio, however, stalled at its early June peak (top of chart). It may be getting ready for another try. Several big banks are leading the financials higher. Chart 4 shows Bank of America (BAC) having cleared its spring high and having a strong day today. Chart 5 shows Citigroup (C) close to an upside breakout. Stronger financials are a plus for the stock market and the economy.
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Chart 3
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Chart 4
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Chart 5
TRANSPORTATION ISHARES NEAR UPSIDE BREAKOUT ... Once again, transportation stocks appear to be on the verge of a bullish breakout. Chart 6 shows Transportation Average iShares (IYT) on the verge of breaking through their April/September highs. Their relative strength ratio (top of chart) also appears to have bottomed. I recently showed buying in airlines and air freight. Rails, however, have been the strongest part of the transportation group and are leading it higher today. As I showed yesterday, transports are now outperforming utilities which is a positive sign. A transportation breakout would be another good sign for the market and the economy.
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Chart 6
RAILS AND UNION PACIFIC LEAD TRANSPORTS HIGHER... Chart 7 shows the Dow Jones US Railroad Index ($DJUSRR) rising above its October peak to establish a new uptrend. It's relative strength (solid) line is rising as well. Its 50-day average cleared its 200-day in May. One of the premises of Dow Theory is that transportation stocks should rise with the industrials. Industrials make the goods while transports (like rails) move them to market. The economy (and the market) are stronger when both are moving up together. The rails have already turned up. The entire transportation group is on the verge of doing the same. Chart 8 shows Union Pacific (UNP) also in an uptrend. CSX (not shown) looks the same. Norfolk Southern (NSC) isn't far behind,.
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Chart 7
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Chart 8
RISING OIL MAY BE PULLING YIELDS HIGHER ... Chart 9 shows the 10-Year Treasury Yield ($TNX) bouncing on Friday after selling off most of the week. That's partially due to profit-taking in bonds as a result of a strong Friday stock market. I can't help wondering, however, if this week's upside spike in oil is also having an impact on yields. Rising commodity prices are potentially inflationary. That's usually bad for bond prices and supportive to yields. In a normal situation, rising commodity prices would have more of an upward pull on interest rates. But these aren't normal times. Central bankers are keeping a heavy thumb on bond yields. Rising oil prices, however, may tempt central bankers (especially the Fed) to start taking their thumb off the scale and let rates react to market forces. Today's bond yield bounce helped make utilities and REITs the only sectors in the red, but supported financials. All other sectors are in the black, led by financials and energy.
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Chart 9
S&P 500 TRIES TO REGAIN 50-DAY LINE... A stock market rally on Friday puts the S&P 500 in position to reclaim its 50-day moving average. It also keeps the SPX well above chart support at its mid-September low. The 14-day RSI line (top of chart) is still trying to clear its 50 line. Daily MACD lines (below chart) have turned positive from chart support at their June low. With September nearing a close, stocks are entering a more favorable seasonal period during the fourth quarter.
