BOND YIELDS MAY BE BOTTOMING -- RISING OIL AND METAL PRICES MAY ALSO BE BOOSTING YIELDS -- COPPER STOCKS LEAD RALLY IN MINERS -- RISING BOND YIELDS ARE BOOSTING BANKS AND OTHER FINANCIAL STOCKS -- RISING YIELDS MAY BE HURTING TECHS

BOND YIELDS MAY BE BOTTOMING... Bond yields are jumping today. Their chart patterns also suggest that yields may be bottoming. Chart 1 shows the 10-Year US Treasury YIeld ($TNX) jumping 6 basis points today to push it back above its (red) 200-day average. The trendline drawn over its May/July highs has the look of a potential "neckline", which is usually part of a basing pattern. The TNX would need to clear its July peak near 2.40% to signal a bottom. But it may be heading in that direction. Chart 2 shows the 5-Year US Treasury Yield ($FVX) in an even stronger position. That shorter maturity bond has bounced off its 200-day line twice during June and July. In addition, its "neckline" drawn over its May/July peaks has an upward slope. That increases the odds for higher bond yields. The 5-year yield is also more sensitive to potential rate hikes from the Fed. One of the factors behind climbing bond yields (and falling bond prices) may be climbing commodity prices. Especially energy and base metal prices.

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Chart 1

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Chart 2

COPPER AND OIL PRICES ARE CLIMBING... Thanks to a pledge from Saudi Arabia for deeper OPEC production cuts, the price of crude oil is up more than 3% today. Chart 3 shows the United States Oil Fund (USO) also climbing 3% which is enough to push it back above its 50-day moving average to a two month high. Crude oil (and most other commodities) are also getting a lift from a falling dollar. Oil is also in a support zone (near last November's low) and in an oversold condition. More aggressive OPEC cuts would increase the likelihood of higher energy prices. That would be inflationary. So would higher base metal prices which are also jumping. A message from the previous Monday (July 17) showed base metal prices jumping on strong economic news from China. Two of the strongest commodities were copper and iron ore, which are rallying again today. The price of copper is up nearly 4% today (3.8%). Chart 4 shows the iPath Bloomberg Copper ETN (JJC) clearing its February high, putting the price of copper at the highest level in two years. Higher base metal and energy prices could be passed on to consumers which translates into higher inflation, which should produce higher bond yields. That helps explain why energy, materials, and financials are the day's three strongest sectors.

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Chart 3

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Chart 4

METALS LEAD MATERIALS TO NEW HIGHS... Chart 5 shows the Materials Sector SPDR (XLB) hitting a new record high today. It's being led higher by copper and mining stocks. Chart 6 shows the Global X Copper Miners ETF (COPX) climbing nearly 5% to a five-month high. Freeport McMoran (FCX) is leading the COPX higher with a daily gain of 15% (and is the biggest percentage gainer in the S&P 500). Chart 7 shows the S&P Mining and Metals SPDR (XME) climbing as well. The XME is being led higher by iron ore miners Rio Tinto (RIO) and BHP Billiton (BHP) as well as steel stocks. [A recent financial article claimed that the use of copper in electric car batteries could lead to global shortages of that metal in the years ahead].

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Chart 5

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Chart 6

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Chart 7

FINANCIAL SPDR BREAKS OUT TO ALL-TIME HIGH... Rising bond yields are giving a big lift to financial stocks today. The daily bars in Chart 8 show the Financial SPDR (XLF) breaking out to a new high for the year. Its relative strength line (above chart) is climbing as well. But it gets even better. The monthly bars in Chart 9 show the XLF also clearing its 2007 intra-day high of 25.21. It's one of the last sectors to do that. The XLF/SPX ratio on top of Chart 9 also shows how much financials have lagged behind the broader market since the financial crisis a decade ago. That also makes financials one of the cheapest parts of the stock market and one of its best values. Today's financial gains are being led higher by banks, brokers, life insurers, and asset managers.

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Chart 8

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Chart 9

BANKS ARE CHEAPEST PART OF XLF... Not only are banks one of the cheapest parts of the stock market, they're also the cheapest part of the financial sector. The lines on top of Chart 10 show the Dow Jones Asset Managers Index, Broker-Dealers and Security Exchange iShares and Insurance iShares already trading at new highs. Those financial leaders show 2017 gains of 15%, 12%, and 9% respectively. By contrast, the S&P Bank SPDR (KBE) is up only 3% this year. Those are the price bars in Chart 10. The chart shows the KBE gapping 2% higher today after recently bouncing off its (blue) 50-day average. A close above its early July peak (which appears likely) would be a positive sign. The fact that other parts of the financial sector have already turned up greatly increases the odds that banks will follow in the same direction. So there are a couple of messages here. The financial sector as a group is undervalued and starting to play catchup. Within that sector, asset managers, brokers/exchanges, and insurers are the clear leaders. That makes banks the cheapest part of that sector and possibly the best value.

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Chart 10

RISING RATES COULD HURT TECHNOLOGY... Stocks are having a strong day with most major stock indexes hitting record highs. Not surprisingly, bond proxies like utilities are lagging behind as are defensive consumer staples. Technology, however, is also lagging. Some of that may be due to disappointing earnings. But there may be more at work here. My July 14 message carried the headline "Rising Bond Yields Can Be Bad for Technology Stocks". It also suggested that higher rates during the second half could make the going tougher for that group as money rotates into more value-oriented parts of the market like financials. Technology stocks have also gotten a bigger boost from a falling dollar than other sectors. Technology companies get 57% of their revenues from foreign markets (the only sector over 50%). Any serious uptick in U.S. interest rates could be supportive to the dollar which, in turn, could have a dampening effect on technology revenue. The only thing holding the Fed back from raising rates is low inflation. Rising commodity prices, however, could give the Fed more room to raise rates later this year. That would help financials while hurting technology stocks. Especially if a Fed rate hike leads to a higher dollar.