BOND YIELDS GAP HIGHER AND NEAR UPSIDE BREAKOUT -- THAT'S HELPING PUSH FINANCIAL SPDR TO NEW RECORD -- BANKS AND INSURERS ARE LEADING XLF HIGHER -- INDUSTRIAL SPDR ALSO NEARS NEW RECORD WITH HELP FROM TRANSPORTS -- MATERIAL SPDR NEARS NEW RECORD
UPSIDE BREAKOUT IN BOND YIELDS MAY BE IMMINENT... Bonds yields are jumping again today. That may be based on increased chances for a tax reform package. Chart 1 shows the 10-Year Treasury Yield ($TNX) gapping 6 basis points higher in Friday trading. That puts the TNX within striking distance of overhead resistance near 2.40%. An upside breakout is not only likely, but appears imminent. That's pushing Treasury bond prices sharply lower today, and is weakening stocks tied to bonds like utilities and REITS. Defensive consumer staples are also losing ground. [The stock/bond (SPY/TLT) ratio that I showed on Wednesday is also in record territory]. Money is moving into economically-sensitive stocks that do better in a stronger economy. That includes consumer cyclicals, materials, industrials (including transports) and small caps -- all of which are leading today's stock rally. Not surprisingly, financials are the day's standout performers.

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Chart 1
FINANCIAL SPDR HITS NEW RECORD ... Financials are usually the biggest beneficiaries of rising bond yields. And that's certainly the case today. Chart 2 shows the Financial Sector SPDR (XLF) gapping into record territory. The XLF is the day's strongest sector. Banks are leading it higher. Chart 3 shows the S&P Bank SPDR (KBE) gapping up to the highest level in nearly eight months. Insurance stocks are also having a strong week. Chart 4 shows U.S. Insurance iShares (IAK) achieving a bullish breakout into record territory. Financial shares usually do better in a stronger economy. So do other economically-sensitive stocks.

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Chart 2

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Chart 3

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Chart 4
TRANSPORTS HELP LEAD INDUSTRIAL SECTOR HIGHER... The daily bars in Chart 5 shows the Industrial SPDR (XLI) on the verge of hitting a new record. That economically-sensitive sector has also helped lead the market rally since the start of September. That's shown by the rising gray line which is a ratio of the XLI divided by the S&P 500. As I've explained in several previous messages, the XLI includes transportation stocks which have also been helping lead that sector higher. The lower box in Chart 5 shows the Dow Transports also nearing a new record (and helping lead today's rally). Two of today's top percentage gainers in the XLI are CSX and J.B. Hunt (JBHT) which are transportation stocks. Rails and truckers have been among the strongest groups in the TRAN and the XLI. Both groups usually do better in a strengthening economy.

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Chart 5
MATERIALS ALSO NEAR NEW RECORD... Materials are also one the day's stronger sectors. That makes sense considering that rising material shares suggest a stronger economy. The fact that so many of them are tied to commodity prices also hints at higher inflation. Both are consistent with rising interest rates. Chart 6 shows the Materials SPDR (XLB) nearing a new record. It's recent leadership can be seen by the rising gray line (the XLB/SPX ratio). Today's XLB bounce is being led by aluminum and steel stocks. Copper shares have also been rising. By contrast, gold shares are lagging behind (more on that shortly). That also makes sense. Gold doesn't do well when rates are rising. That's especially true when rising U.S. rates are boosting the dollar.

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Chart 6
BOUNCING DOLLAR HURTS GOLD -- RISING RATES BOOST COPPER SHARES... The fact that U.S. rates are rising faster than elsewhere on the globe is boosting the dollar. A rising dollar usually hurts the price of gold. And it is. Chart 7 shows the upturn in the Dollar Index (UUP) near the start of September (when Treasury yields turned up) coinciding with a decline in gold (GLD). It also makes economic sense that a stronger global economy would favor stocks tied to industrial metals (like aluminum, copper, and steel) over gold. And that is certainly the case. The rising brown line in Chart 8 is a ratio of the copper miners ETF (COPX) divided by gold miners (GDX). The ratio recently hit a new high for the year (thanks to a three-year high in the price of copper). Notice how closely the copper/gold mining ratio has tracked the 10-Year Treasury yield (green line). The fact that both lines are rising together is a vote of confidence in the global economy.

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Chart 7
