MAJOR STOCK INDEXES SUFFER BIGGEST DROP THIS YEAR -- SMALL CAPS AND TRANSPORTS LOOK EVEN WORSE -- BANKS LEAD FINANCIALS LOWER ON FALLING BOND YIELDS -- FALLING DOLLAR BOOSTS GOLD -- EURO NEARS TEST OF FEBRUARY HIGH
STOCK ETFS SELLOFF... The market is suffering its worst day this year. Chart 1 show the PowerShares Nasdaq QQQ experiencing a downside reversal day after hitting a record high this morning. Its 14-day RSI has fallen out of overbought territory over 70 for the first time since December which shows loss of upside momentum. Daily MACD lines (below chart) are negative. Chart 2 shows the Dow Jones Industrials SPDR (DIA) falling to the lowest level in a month. Finally, Chart 3 shows the S&P 500 SPDR (SPY) doing the same. This could be the market's first serious setback since the election. A retest of their respective 50-day averages is a possibility. The fact that small caps and transports are falling even harder is another sign of weakness.
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Chart 1
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Chart 2
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Chart 3
SMALL CAPS AND TRANSPORTS ARE EVEN WEAKER... Relative weakness in small caps and transports has been written about in previous messages as possible warning signs of a market pullback. Their weak action today adds to short-term market concerns. Chart 4 shows the Russell 2000 Small Cap Index ($RUT) falling nearly 2% today and back below its 50-day moving average. A test of its February low now appears likely. It's usually a sign of weakness when small caps are doing worse than large caps. The same is true of transports versus industrials. Chart 5 shows the Dow Jones Transportation Average falling to the lowest level since December, and well below its 50-day line. That breaking of support should put downside pressure on the Dow Industrials. Utilities are bouncing today along with bond prices and falling bond yields. Bank stocks are falling.
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Chart 4
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Chart 5
BANK STOCKS TUMBLE... With bond yields falling, bank stocks are also falling along with them. That's what normally happens. Rising bond yields since the election made bank stocks one of the market's strongest groups. Falling bond yields are having the opposite effect. Chart 6 shows the S&P Bank SPDR (KBE) tumbling 4% today and pushing it well below its 50-day average. Its January low is also in jeopardy. Financial stocks are the day's weakest sector on falling bond yields. Chart 7 show the 10-Year Treasury Yield pulling back from chart resistance around 2.6% and in danger of slipping below its 50-day average. Falling yields are giving a boost to bond prices. High yield bonds (which are the closely tied to stocks) are the only bond category in the red today.
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Chart 6
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Chart 7
FALLING DOLLAR BOOSTS GOLD... Chart 8 shows the PowerShares Dollar Index ETF (UUP) gapping down to the lowest level in nearly two months. It's biggest losses are against the British pound, the euro, and the yen. That's normally bullish for gold prices which are climbing today. Chart 9 shows the Gold SPDR (GLD) trading above a rising 50-day average, and nearing its 200-day line. Gold is also getting a boost from falling bond yields and a weaker stock market.
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Chart 8
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Chart 9
EURO NEARS TEST OF FEBRUARY HIGH ... The recent drop in the dollar isn't just due to impatience over Washington's slow pace in passing legislation that can boost the economy, or last week's dovish Fed statement. It's also due to growing signs of strength in Europe. Chart 8 shows the Euro nearing a test of its February high. A close above that barrier would turn the trend of the Euro higher and lead to a test of its 200-day line (red arrow). The Euro has the biggest influence on the direction of the Dollar Index (57%). Other European currencies, however, are also rising. I take that as a sign that some global money is starting to rotate into European markets that are starting to improve while being viewed as cheaper than those in the U.S. Emerging market currencies are also rising which is one of reasons that EM stocks are having such a good start to the year.
