10-YEAR TREASURY YIELD IS BOUNCING OFF ITS 50-DAY AVERAGE -- DOLLAR INDEX ALSO BOUNCES OFF SUPPORT -- GOLD MARKET MEETS RESISTANCE -- DOW REMAINS FLAT -- STOCK/ BOND RATIO STILL FAVORS STOCKS -- UPTREND IN JUNK BONDS IS ALSO STRETCHED
10-YEAR TREASURY YIELD BOUNCES OFF 50-DAY AVERAGE ... The pullback in Treasury yields (coinciding with an oversold bounce in Treasury prices) may have run its course. Chart 1 shows the 10-Year Treasury Yield ($TNX) bouncing sharply off its 50-day moving average. The two momentum indicators above Chart 1 are also supportive. The 14-day RSI (green) line is back above the 50 level. The more sensitive 14-day Slow Stochastics oscillator (top box) is rebounding from oversold territory below 20. My Saturday message also showed potential support at its November 2015 peak ranging from 2.34% to 2.30%. That may also be providing a floor beneath the TNX. [Pullbacks should find support near previous peaks as resistance turns into support]. Keep in mind also that longer-range weekly and monthly charts support a new uptrend in Treasury yields. Higher yields are pushing Treasury bond prices lower. They may also start to weigh on rate-sensitive stock groups like staples, utilities, and REITS. All three of those groups have rebounded along with bond prices over the past month, but are starting to struggle with resistance at their respective 200-day averages. They could start to weaken along with bond prices. Rising yields should also support financial stocks. Money moving out of bonds may also find its way back into stocks. That's a lot riding on a two-day bounce. But we'll be watching closely over the next week to see if the rebound in yields continue.
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Chart 1
THE DOLLAR IS ALSO BOUNCING... Not surprisingly, the U.S. dollar is bouncing with bond yields. That's not surprising since both rose together after the November election, and have pulled back together over the past month. And it too is bouncing off chart support. Chart 2 shows the PowerShares Dollar Fund (UUP) climbing back over its 50-day average. It's also bouncing off a rising trendline drawn under its September/November lows. [Although not shown here, the Dollar Index is also bouncing off a previous peak formed in November 2015]. The dollar hit a 14-year high last month, which means that its long-term trend is higher. Part of the reason for today's dollar buying is tied to weakness in the Euro. The ECB decision to stand pat on monetary policy in the face of rising eurozone inflation stands to widen the interest rate gap between the U.S. (which plans to raise rates) and the eurozone (which doesn't). Rising Treasury yields are also supportive to the dollar.
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Chart 2
GOLD MEETS RESISTANCE... The pullback in the dollar over the last month has given a boost to gold which usually trends in the opposite direction. Chart 3, however, shows that the Gold Shares SPDR (GLD) remains in a major downtrend and is meeting resistance along its spring 2016 lows (flat line). That's an example of previous support turning into new resistance. Gold also remains below a falling trendline (blue line) drawn over its September/November highs. Its 14-day RSI line (below chart) has also reached overbought territory at 70. All of which should make further upside progress more difficult. Needless to say, an upturn in the dollar would also have a depressing effect on gold (as would a rebound on Treasury yields). If bond yields and the dollar are in fact turning up again, it will be interesting to see if that's enough to pull stocks out of their current trading range.
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Chart 3
DOW REMAINS FLAT ... The market remains in a holding pattern within a major uptrend. The daily bars in Chart 4 show the Dow industrials stuck in a six-week trading range just below 20K. That's not necessarily a bad thing. It's just one way to work off an overbought condition. The blue line on top of Chart 4 shows the 14-day RSI line having reached very overbought territory over 80 during December which called for a period of consolidation or a pullback to relieve that stretched condition. The RSI line has since dropped very close to its midpoint 50 line. The 50 line often provides support during a period of consolidation. A downside correction could push the RSI line closer to the 30 level (as happened in early November). Even if that were to occur, support would be likely near its 50-day average. That wouldn't do much to threaten its major uptrend. What's also stalling the Dow's advance is that its weekly and monthly RSI lines are also in overbought territory. That may suggest a longer period of backing and filling, but not enough to threaten the market's overall uptrend. Traders may simply be waiting until after tomorrow's inauguration to take some bolder action. We may have a better idea about the market's short-term direction next week.
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Chart 4
STOCK/BOND RATIO STILL FAVORS STOCKS... Stocks are still a better place to be than bonds. Chart 5 plots a ratio of the S&P 500 SPDR (SPY) divided by the 20+Year Treasury Bond ETF (TLT) over the last three years. The stock/bond ratio bottomed early this year and has since risen to the highest level in ten years. The ratio is up today after bouncing off its 50-day average. That's mainly because Treasury bond prices are dropping. Chart 5 makes a strong case in favor of stocks over bonds. The only bond category that has kept pace with stocks are high-yield investment grade bonds. That's because they usually track closer to stocks than bonds. Chart 6 shows the iBoxx High Yield Corporate Bond ETF (HYG) also in a holding pattern within a rising trend. It too is struggling with a short-term overbought condition. But the fact the high-yield bonds are doing better than Treasuries is another positive sign for stocks.
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Chart 5
