BOND YIELDS MAY BE BOTTOMING -- BOND ETF FAILS AT 200-DAY AVERAGE -- RELATIVE WEAKNESS IN UTILITIES AND REITS HINT AT LOWER BOND PRICES -- FINANCIALS MAY BE TURNING UP -- A HIGHER FINANCIALS/UTILITIES RATIO WOULD SIGNAL HIGHER YIELDS
TEN-YEAR TREASURY YIELD STILL IN UPTREND... Today's Fed announcement contained no surprises. However, the Fed's view that recent economic softness is "transitory" in nature appears to have caused an uptick in bond yields. Technical factors also appear to favor higher yields. I'll try to demonstrate how recent intermarket comparisons appear to support that view. But let's look at some bond charts first. Chart 1 shows the rally in the 10-Year Treasury Bond Yield that started from record lows last July. A big part of that rally took place after the election into the middle of December. It's been in corrective mode since then. The flat Fibonacci retracement lines shows that the TNX has retraced about 38% from last summer's low which is pretty normal in a downside correction. The TNX also remains above its 200-day average (red arrow). In addition, its 14-day RSI line (top of chart) is starting to rebound from oversold territory at 30. [Daily MACD lines are turning positive for the first time since mid-March]. That makes this a logical spot for bond yields to start bouncing.
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Chart 1
TREASURY BOND ETF FAILS AT 200-DAY AVERAGE... In order for bonds yields to go up, bond prices need to start dropping. And they appear to be doing that. Chart 2 shows the four-month rebound in the 7-10 Treasury Bond iShares (IEF) being stopped by its 200-day moving average (red arrow). Its 14-day RSI line (top of chart) has turned down from an overbought reading at 70 during April. [And MACD lines have turned negative]. This would be a logical chart spot for the rally in bond prices to end. Other intermarket comparisons also appear to support lower bond prices.
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Chart 2
UTILITIES START TO UNDERPERFORM... Yesterday's message showed defensive consumer staples starting to underperform the market, and mentioned that other recent safe havens are weakening as well. That includes utilities. Chart 3 shows the Utilities Sector SPDR (XLU) in danger of falling below its 50-day average. It's already started to underperform the market on a relative basis. The XLU/S&P 500 ratio (red line) peaked in mid-April and is dropping. Utilities usually underperform the rest of the market when bond prices are falling. In other words, the XLU/SPX ratio usually trends in the same direction as bond prices. Chart 4 shows the same weakening in the Real Estate Sector SPDR (XLRE). Both are proxies for the bond market.
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Chart 3
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Chart 4
FINANCIAL SPDR MAY BE TURNING HIGHER... The direction of financial stocks also has some bearing on the direction of bond prices and yields. That's because financial stocks like banks and insurers benefit from higher bond yields and lower prices. And they may be turning higher. Chart 5 shows the Financial Sector SPDR (XLF) forming a potential basing pattern above its January low. A close above its 50-day average (blue line) would be a positive sign, and put the XLF at the highest level in six weeks. Its 14-day RSI line (top of chart) is rising as well. [And daily MACD lines have turned positive]. The red line is a relative strength ratio of the XLF divided by the S&P 500. After dropping during the first four months of the year, the ratio has stabilized over the last month and may be bottoming. Financials were today's strongest sector, led by banks.
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Chart 5
FINANCIALS/UTILITY RATIO MAY BE BOTTOMING ... An even better way to determine the likely direction of bond yields is to compare financials to utilities directly. Chart 6 plots a ratio of the Financials SPDR (XLF) divided by the Utilities SPDR (XLU). After rising from last July to December (as bond yields were rising), the ratio weakened until April. During those four corrective months, utilities outperformed financials. That normally happens when bond prices are rising and yields dropping. The XLF/XLU ratio, however, is bouncing off a rising trendline extending back to last July and in the area of its 200-day average (red arrow). That's a logical spot on the chart for the ratio to start rising again. If it does, look for bonds yields to rise along with it.
