OVER-EXTENDED TREASURY YIELDS PULL BACK -- DO DOES THE DOLLAR -- THAT'S BOOSTING GOLD AND GOLD MINERS -- WEAKER DOLLAR AND STRONG YUAN ALSO BOOST EMERGING MARKETS -- UPTREND IN FINANCIALS IS STALLING -- WHILE UTILITIES STRENGTHEN
10-YEAR TREASURY YIELD PULLS BACK ... After the steep ascent in Treasury bond yields since the November 8 election, it's not too surprising to them pulling back a bit. There are a couple of technical reasons for that. The daily bars in Chart 1 show the 10-Year Treasury Yield ($TNX) stalling around the mid-2015 peak near 2.5%. It climbed above that chart barrier temporarily during December, but wasn't able to hold it. That's because the 14-day RSI line (top of chart) had reached overbought territory over 70 and was already starting to weaken (falling red line). The RSI line is now slipping below 50 which signals a deeper pullback. That's lending support to bond prices which had become deeply oversold. That doesn't mean that the upturn in bond yields is over. It just means that they rose too far, too fast and are due for a pullback. But their pullback is having ripple effects elsewhere. The main impact is a weaker dollar. That's giving a boost to gold and gold miners. The falling dollar is also helping boost emerging markets.
(click to view a live version of this chart)
Chart 1
DOLLAR INDEX WEAKENS... Chart 2 shows the PowerShares Dollar Index Fund (UUP) also in a short-term pullback. There again, a short-term "negative divergence" in its overbought 14-day RSI line (top of chart) shows loss of upside momentum. The UUP may now retest its 50-day average. The Dollar Index just recently hit a 14-year high, so its major trend is still up. The current pullback, therefore, still should be viewed as a temporary setback. Even so, it is impacting other markets -- especially gold and gold miners. They're usually the main beneficiaries of a weaker dollar.
(click to view a live version of this chart)
Chart 2
GOLD MINING ETF CLEARS 50-DAY LINE... The daily bars in Chart 3 show the VanEck Vectors Gold Miners ETF (GDX) climbing back above its 50-day average for the first time since last August. Its 14-day RSI line (top of chart) has risen to the highest level in five months. Gold miners are also rebounding faster than the commodity. Chart 4 shows a ratio of the GDX divided by SPDR Gold Shares (GLD) rising to a two-month high. That's also a positive sign. The GDX, however, remains well below its 200-day average and is still in a downtrend. And a lot of the buying in gold is the result of the pullback in the dollar and Treasury yields, which is most likely temporary. That calls into question the longer-term prospects for gold and gold miners.
(click to view a live version of this chart)
Chart 3
(click to view a live version of this chart)
Chart 4
EMERGING MARKETS IMPROVE... Emerging markets are especially vulnerable when the dollar is rising and commodities falling. So it makes sense that they're getting a boost from the pullback in the dollar. The red line in Chart 5 shows Emerging Markets iShares (EEM) rising back above both moving average lines. The green line represents the WisdomTree Emerging Currency Fund (CEW). It too is jumping with the EEM. Emerging currencies are benefiting from the dollar pullback. The Chinese yuan is the biggest reason why. The offshore yuan (traded in Hong Kong) has just experienced the biggest two-day jump in years. That helping push Chinese stocks higher. A falling dollar also relieves pressure on other Asian currencies along with their stock ETFs.
(click to view a live version of this chart)
Chart 5
AUSSIE AND CANADIAN ISHARES IMPROVE... Commodity currencies usually do better when the U.S. Dollar is weak and commodity prices are rising. That also benefits their respective stock ETFs. Chart 6 shows Australia iShares (EWA) climbing to the highest level since spring 2015. That reflects stronger Australian stocks as well as a stronger currency. Australia also benefits from any signs of improvement in China which is the biggest buyer of its commodities. Chart 7 shows Canada iShares (EWC) in a similar uptrend. The EWC is also benefiting from stronger Canadian shares and stronger local currency. Both ETFs are quoted in U.S. dollars. As a result, they do better when the dollar is weakening and the Aussie and Canadian dollars are strengthening. The prospect for higher commodity prices also benefits both countries. [The Toronto Composite Stock Index traded today at the highest level since late 2014 and is less than a percentage point from a record high].
(click to view a live version of this chart)
Chart 6
(click to view a live version of this chart)
Chart 7
OVERBOUGHT FINANCIALS WEAKEN ... The pullback in Treasury yields is also having a negative impact on financial shares. The green bars in Chart 8 show the uptrend in the Financial Sector SPXR (XLF) stalling (see box). In addition, its 14-day RSI line (top of chart) is weakening. That suggests that its rally is stretched too far and that it's due for more consolidation or a short-term pullback. The XLF remains well above its 50-day average (blue line) which also suggests an overbought condition. That suggests that the broader stock rally is in the same over-extended condition. That may explain why rate-sensitive defensive stock groups like utilities and consumer staples are rebounding. The red lines in Chart 8 show a rebound in the Utilities SPDR (XLU). It appears that investors are turning a bit more cautious over the short term. That might also explain the recent buying of gold.
