BIG DROPS IN BOND YIELDS AND DOLLAR SHOW LOSS OF CONFIDENCE -- FINANCIALS, SMALL CAPS, AND TRANSPORTS LEAD MARKET LOWER -- FALLING STOCK INDEXES ARE SUFFERING SHORT-TERM CHART DAMAGE -- TRADERS COULD BE SELLING IN MAY

BOND YIELDS CONTINUE TO DROP ... My Saturday message issued some short-term warnings for the market. Part of that warning came from falling bond yields which hinted that fixed income traders were turning more pessimistic. Another came from weak performances by banks, small caps, and transports which are leading the stock market lower today. That caution has finally spilled over into major stock indexes which are also falling sharply. A tumbling dollar also shows some loss of confidence. Let's start with bond yields. Chart 1 shows the 10-Year Treasury Yield falling to the lowest level in a month. That's pulling safe haven money out of stocks and into bonds. And it's having a predictable effect on a couple of stock sectors. While falling yields are boosting bond proxies like utilities, they're hurting financial stocks, and banks in particular.

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Chart 1

BANK ETF NEARS APRIL LOW... Falling bond yields are taking a heavy toll on financial stocks like banks and insurers. As a result, financials are the day's weakest sector. And they're being led lower by banks. Chart 2 shows the S&P Bank SPDR (KBE) falling more than 3% today and bearing down on its spring lows. That will be an important test for it and the market. A weak dollar continues to weigh on small caps which are breaking down.

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Chart 2

RUSSELL 2000 BREAKS 50-DAY AVERAGE... Relative weakness in small caps has been another danger signal for stocks. And they're getting weaker. Chart 3 shows the Russell Small Cap Index falling decisively below its 50-day moving average. Small caps are falling twice as hard as large caps. That's not good for either. My Saturday message suggested that small caps were being hurt by a weaker dollar. Chart 4 shows the PowerShares Dollar Index ETF (UUP) falling to the lowest level in six months. A falling dollar has also contributed to this year's rotation out of U.S. stocks into foreign markets. The falling dollar is giving a slight boost to commodities today, especially gold.

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Chart 3

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Chart 4

TRANSPORTATION WEAKNESS IS HURTING THE DOW... My weekend message also suggested that falling transportation shares could start to hurt the Dow. That's finally happening. The red bars in Chart 5 show the Dow Transports losing 2% today and bearing down on its 200-day average. The black bars show the Dow industrials falling to the lowest level in a month.

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Chart 5

MAJOR STOCK INDEXES WEAKEN... Major stock indexes are suffering short-term chart damage. Chart 6 shows the Dow industrials falling to a four-week low and trading below their 50-day average for the first time in more than a month. Chart 7 shows the S&P 500 in danger of breaking its 50-day line as well. Chart 8 shows PowerShares Nasdaq 100 QQQ taking a big loss on rising volume. Its 14-day RSI line (above chart), which has been in overbought territory over 70 for the past month, has finally started to weaken. That also suggests profit-taking in an over-extended technology sector.

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Chart 6

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Chart 7

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Chart 8

SELLING IN MAY... A number of caution signs have been warning that stocks were due for a setback. That has apparently started. Political concerns may also be causing traders to re-think the so-called Trump trade. Meanwhile, money has been rotating out of U.S. stocks into foreign markets since the start of year. Some catalyst always surfaces to cause stocks to suddenly take notice of those concerns. It isn't that important which one it is. But here's one more. Seasonal trends start to weaken in May, which often causes traders to start taking some profits. Hence the "sell in May" maxim. That may not be a big factor in today's selling, but it doesn't help.