BOND YIELD FALLS TO FIVE MONTH LOW -- RELATIVE WEAKNESS IN HIGH YIELD BONDS IS BAD FOR STOCKS -- FINANCIALS AND SMALL CAPS LEAD MARKET LOWER -- S&P 500 CLOSES BELOW 50-DAY AVERAGE -- SAFE HAVEN BUYING PUSHES GOLD TO FIVE MONTH HIGH

10-YEAR TREASURY YIELD FALLS TO FIVE-MONTH LOW... Bond yields have been slipping since March as investors have had second thoughts about the so-called Trump bump in stocks and the economy. Geopolitical concerns may also be causing profit-taking in stocks and buying of safe havens like bonds and gold. That risk-off rotation took on more significance today. Chart 1 shows the 10-Year Treasury Yield falling below its 2017 lows to the lowest level in five months. Since bond prices travel in the opposite direction, they're breaking out to the upside. Chart 2 shows the 7-10 Year Treasury Bond iShares (IEF) trading at a five month high. It's now headed toward its 200-day moving average. Investment grade corporate bonds also rallied, while junk bonds didn't.

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Chart 1

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Chart 2

INVESTMENT GRADE CORPORATES OUTPERFORM JUNK BONDS... The green bars in Chart 3 show the iBoxx Investment Grade Corporate Bond iShares (LQD) trading at a new five-month high after clearing its 200-day average. The red bars, however, show the iBoxx High Yield Corporate Bond iShares (HYG) backing off from its early March high. The fact that investment grade bonds are rising, while junk bonds are weakening, carries a potentially negative message for stocks. That's because junk bonds are more closely correlated with stocks than bonds.

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Chart 3

JUNK BONDS UNDERPERFORM... It's often instructive to see what various bond categories are doing relative to each other. That can tell us something about the mood of the bond market, as well as stocks. Right now, that mood is defensive. The green bars in Chart 4 show a relative strength ratio of the high yield bond ETF (HYG) divided by the investment grade ETF (LQD). The rising ratio since November favored high yield bonds. That's also when stock prices were rising. The falling ratio over the last month shows high yield bonds lagging. That also shows loss of risk appetite between the two bond categories. The falling HYG/LQD ratio also sends a negative message for stocks.

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Chart 4

FINANCIALS AND SMALL CAPS LEAD MARKET LOWER... Stocks ended the short trading week on the downside. Chart 5 shows the S&P 500 SPDR (SPY) closing well below its 50-day average. A test of its March low now appears likely. Small caps did even worse. Chart 6 shows the Russell 2000 iShares (IWM) losing 1% today, and nearing a test of its 2017 low. Relative weakness in small caps is normally a caution flag for the market. The same is true with financials (-1.3%). Chart 7 shows the Financials SPDR (XLF) falling to a three month low. The breakdown in bond yields was the main reason why financials are falling. Energy, which had been one of the market's strongest sectors of late, was the day's biggest loser (-1.8%). That may also account for some of the selling in junk bonds which has a big weighting in energy. All in all, a good week for bonds and a bad week for stocks. With bond yields and stocks falling, it was also a good week for gold.

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Chart 5

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Chart 6

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Chart 7

GOLD CLIMBS TO FIVE-MONTH HIGH ... Gold was the other big safe haven winner this week. Chart 8 shows the Gold SPDR (GLD) ending the week at the highest level since November, after clearing its 200-day average. Falling bond yields, and a weaker stock market, are normally good for gold. It certainly was this week. A weekly loss for the dollar also supported gold.

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Chart 8

HAPPY EASTER AND HAPPY PASSOVER... Financial markets are closed for Good Friday.