TREASURY BOND ETFS ARE TRYING TO BOUNCE OFF 200-DAY AVERAGE -- SO ARE RATE-SENSITIVE UTILITIES AND REITS -- CONSUMER CYCLICALS TRADE SIDEWAYS BUT UNDERPERFORM S&P 500 -- UNITEDHEALTH KEEPS XLV ABOVE 200-DAY LINE
20+YEAR TREASURY BOND ISHARES TEST 200-DAY AVERAGE... Before getting to rate-sensitive stocks ETFs that are testing their 200-day averages, it's necessary to first look at what Treasury ETFs are doing. That's because they've all been falling together. Chart 1 shows the 20-Year Treasury Bond iShares (TLT) in the process of testing its 200-day moving average. Short-term indicators (above and below) also reflect a short-term oversold condition. As you'll see in a second, that's pretty much what several rate-sensitive stock ETFs are doing. It was the sharp jump in Treasury yields starting in July that pushed bond prices lower and rate-sensitive (dividend-paying) stocks with them. That explains why so many of them are now at an important support point. That could be an important test for the market as well. Chart 2 shows the 7-10 Year Treasury Bond iShares (IEF) also near its 200-day line and testing a potential support line drawn over its spring highs. What both bond ETFs do from here should help determine what rate-sensitive stocks will probably do.
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Chart 1
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Chart 2
UTILITIES AND REITS ARE ALSO TESTING SUPPORT... Utilities have been falling with Treasuries since midyear. Chart 3, however, shows the Utilities Sector SPDR (XLU) trying to find support around its 200-day average (red circle). In addition, the XLU is testing potential support along the horizontal trendline drawn over its early 2015 high and its spring 2016 lows. That would be a logical spot for oversold utilities to start finding some support. Chart 4 shows the Dow Jones REIT SPDR (RWR) in a similar situation. In addition to testing its 200-day average (red circle), RWR has also reached a potential support shelf drawn over its December high and below its spring lows. The Consumer Staples Sector SPDR (XLP) and and big telecom stocks like AT&T and Verizon are also testing potential support at their their 200-day lines. So here's the message. Falling bond prices over the last quarter have punished dividend-paying stocks which has also weighed on the rest of the market. They've now reached an important support point at their 200-day averages -- as have Treasury bond prices. That could be an important support point for the market as a whole.
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Chart 3
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Chart 4
CONSUMER DISCRETIONARY SPDR UNDERPERFORMS... The fact that defensive stocks like consumer staples have underperformed the market during the second half isn't so bad. The fact that economically-sensitive consumer cyclical stocks have also been underperforming isn't good. Chart 5 shows the Consumer Discretionary SPDR (XLY) trading just above its September low and its 200-day average (red line). Needless to say, it's important that it stay above both levels. The real problem is the red line on top of Chart 5 which is a relative strength ratio of the XLY divided by the S&P 500. The line has been falling since May as the XLY has underperformed the SPX by about 3%. That's not normally a good sign. So far, no serious chart damage has been done to the XLY chart. But it's now in a battle between resistance at its falling 50-day average (blue line) and its flat 200-day line. It's worth keeping a close eye on for potential clues above overall market direction. The XLY is getting a boost today from a nearly 20% jump in Netflix.
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Chart 5
CYCLICALS ARE GAINING ON STAPLES... Another way to judge the market's strength or weakness is to plot a ratio of economically-sensitive consumer cyclicals versus the more defensive consumer staples. The black line in Chart 6 is a relative strength ratio of the Consumer Discretionary SPDR (XLY) divided by the Consumer Staples SPDR (XLP). The big drop in the ratio between last December and January resulted from the market yearend swoon when investors flocked to defensive stocks. Since the February bottom, however, the rising ratio shows cyclicals doing better. The ratio recently rose to the highest level in six months and has a slight upward bias. It has also cleared both moving average lines, and the blue 50-day line is higher than the red 200-day. The XLY:XLP ratio, however, would still have to clear its April peak to turn the ratio into an uptrend. It's worth keeping an eye on.
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Chart 6
UNITEDHEALTH GROUP BOOSTS HEALTHCARE SECTOR... The healthcare sector is being thrown a lifeline today. Chart 7 shows the Health Care Sector SPDR (XLV) trying to find support at its 200-day average. It's also near potential chart support near its spring low. Most of today's gains are coming from a 7% jump in Unitedhealth Group (UNH). Chart 8 shows UNH surging today in heavy trading. Other health care providers also gained. The XLV, however, is going to need a lot more help from biotechs and pharmaceuticals to keep it above its 200-day average.
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Chart 7
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Chart 8
S&P 500 BOUNCING OFF SEPTEMBER LOW... Chart 9 shows the S&P 500 Index continuing to find support along its September low and its June high. That's a positive sign. The SPX, however, still needs to clear its October high and 50-day average to turn its short-term trend back up again. Foreign stocks are rallying today, led by emerging markets like China. A pullback in Treasury yields (and a slightly weaker dollar) may be helping. That's putting a bid under gold miners. Chart 10 shows the VanEck Vectors Gold Miners ETF (GDX) bouncing off its 200-day average and potential chart support along its May low. Is it my imagination or are a lot of markets testing 200-day lines? That can be good or bad news depending on whether those long-term support lines hold.
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Chart 9
