BOND YIELDS CLEAR 50-DAY LINE ON YELLEN TESTIMONY -- THAT HELPS FINANCIALS AND HURTS UTILITIES -- FINANCIALS/UTILITIES RATIO TURNS BACK UP -- RISING YIELDS BOOST DOLLAR AND WHICH HURTS GOLD
BOND YIELDS CLEAR 50-DAY LINE... Previous messages have described Treasury bond yields as consolidating within a major uptrend since mid-December . Today's jump in yields supports that view. In testimomy before Congress today, Janet Yellen warned about the danger of the Fed falling behind the inflation curve. That more hawkish statement pushed bond yields sharply higher (and bond prices lower). Chart 1 shows the 10-Year Treasury yield climbing back above its 50-day average for the first time in two weeks. Its chart pattern has the look of a bullish triangle. Chart 2 shows the 5-year Treasury yield also clearing its 50-day line within a bullish "falling wedge" pattern. The two-year yield (not shown) jumped four basis points. At the same time, bond prices have fallen sharply. This isn't a surprise. Increased signs of rising global inflation argue for higher bond yields. Today's jump in bond yields helped push financial stocks like banks to new highs. At the same time, rate sensitive groups like utilities and REITs are in the red and are the day's weakest groups.
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Chart 1
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Chart 2
FINANCIALS/UTILITIES RATIO IS TURNING BACK UP ... Last Friday's message showed the stock/bond ratio on the verge of resuming its uptrend (which it has since done). I suggested that favored not only higher stock prices, but lower bond prices. That's still the case. Chart 3 plots a ratio of the Financials SPDR (XLF) divided by the Utilities SPDR (XLU). Rising bond yields are good for financials like banks and insurers, but are bad for bond proxies like utilities (and REITs). Chart 2 shows the XLF/XLU ratio mirroring the sideways consolidation in bond yields over the last two months. Today's upside breakout suggests resumption of the uptrend which favors financials. It also argues for higher bond yields. And a higher dollar.
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Chart 3
RISING DOLLAR HURTS GOLD... I've been describing the Dollar Index as being in a short-term correction within a longer-range uptrend. My February 1 message showed the Dollar Index in support at its 50% retracement level measured from its August low to its early January high. Chart 4 shows the PowerShares Dollar Index ETF (UUP) rebounding off that support line. It's also on the verge of exceeding its 50-day average. Its 14-day RSI line (above chart) has climbed back above 50. While its daily MACD lines (below chart) have turned positive. That's a direct result of today's jump in bond yields. The two markets have been highly correlated since the election. A rising dollar is bearish for gold. A recent message also showed a positive correlation between the euro and gold (since both move opposite the dollar). I pointed out that the inability of the euro to rally was a negative sign for gold. The blue bars in Chart 5 show the euro falling back below its 50-day moving average. At the same time, an overbought gold market has started to weaken. Higher bond yields are also bad for gold. So are rising stock prices which continue to hit new records.
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Chart 4
