TWO-YEAR TREASURY YIELD HITS SEVEN -YEAR HIGH ON INCREASED ODDS FOR MARCH RATE HIKE -- THAT'S BOOSTING THE DOLLAR WHICH MAY BE ENDING ITS 2017 CORRECTION -- GOLD ETF STALLS AT 200-DAY LINE -- GOLD MINERS ARE EVEN WEAKER
TWO-YEAR TREASURY YIELD REACHES SEVEN-YEAR HIGH... Chart 1 shows the 2-Year Treasury yield climbing above 1.30% today for the first time in seven years. That shorter term yield is more sensitive to the potential for a rate hike than longer-range maturities. That suggests that fixed income traders are taking expectations for a March rate hike by the Fed more seriously. Fed fund futures yesterday placed the odds for a March hike near 66%. That suggests that bond yields in general are probably headed higher as well. That's also giving a big boost to the U.S. dollar.
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Chart 1
DOLLAR TURNS UP ... Chart 2 shows the U.S. Dollar Index ETF (UUP) climbing to the highest level in six weeks. The dollar is following the 2-Year Treasury yield higher on increased expectations for a March rate hike. Chartwise, the UUP was due for an upturn anyway. Previous messages showed the UUP having retraced 50% of its August/January rally, which put it in a logical support point. Chart 2 also shows "gap support" formed in mid-November right after the election (see box). One final point. The numerals show that the UUP has been in a "wave four" Elliott wave correction since the start of the year. Uptrends usually have five waves. That makes the 2017 decline a correction in an ongoing uptrend. That increases the odds that a "wave five" advance is starting.
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Chart 2
GOLD ISHARES STALL AT 200-DAY LINE... Of all the commodities, gold is most negatively impacted by a rising dollar. Chart 3 shows both moving in opposite directions over the last year. Dollar upturns last August, September, and November coincided with peaks in gold. The gold rally so far this year has been accompanied by a weaker dollar. A dollar upturn would be negative for gold. It's also worth noting that the GLD is meeting resistance at its 200-day average, and a falling trendline exending back to its August peak. Another bad sign for gold is that gold miners are even weaker.
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Chart 3
GOLD MINERS LEAD BULLION LOWER... The bars in Chart 4 show the VanEck Vectors Gold Miners ETF (GDX) backing off sharply from a resistance line drawn over its early November peak. It has since fallen below its 50-day average. Gold miners have fallen more than bullion. That can be seen by the falling brown line which plots a ratio of the GDX divided by GLD. Why that's bad is that miners usually lead the price of the metal in both directions. Miners led the metal lower during 2016 and higher between December and January. At the moment, miners are leading the metal lower. That's also consistent with a higher dollar and increased prospects for a Fed rate hike.
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Chart 4
S&P HOMEBUILDER SPDR BREAKS OUT... Last Wednesday's message showed U.S. Construction iShares (ITB) breaking out to a record high (top box in Chart 5). I pointed out, however, that the S&P Homebuilders SPDR (XRT) had yet to do so. The lower box in Chart 5, however, shows that the XHB may have completed a bullish breakout of its own by clearing its August high. As I explained last week, the reason for the stronger performance by the ITB is that its five biggest stocks (nearly 50%) are homebuilders which have led the housing rally. The XHB has a smaller homebuilder weighting (30%), and many of its biggest stocks come from housing-related stocks (like furnishings and home improvement). Many of those housing-related stocks are now helping lead the XHB higher, including Mohawk (MHK) and Home Depot (HD) which are at record highs. The week's biggest individual boost came from Lowes. Chart 6 shows Lowes (LOW) gapping 6% higher on strong volume. The home improvement stock needs to clear its July high to set a new record. Homebuilders are still the strongest housing group with a weekly gain of 4%.
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Chart 5
