STOCKS TAKE ON A MORE DEFENSIVE TONE AS STAPLES AND UTILITIES TAKE THE LEAD -- UTILITIES HIT NEW RECORD -- JUNK BOND SELLOFF IS ANOTHER CAUTION SIGNAL -- SELLOFF IN DOLLAR MAY BE PUSHING SOME DEFENSIVE MONEY BACK INTO GOLD
UTILITIES HIT NEW RECORD ... With the rest of the market on the defensive, utility stocks are having another strong day. Chart 1 shows the Utilities Sector SPDR (XLU) climbing to another record high today. Utilities are the day's strongest sector (along with consumer staples), while all other sectors are in the red. The solid line on top of Chart 1 is the XLU/SPX ratio which is jumping sharply this week. What's a little unusual is that utility prices usually rise when bond prices are also rising. The green line in Chart 1, however, show that Treasury bond prices have actually dropped this month. Bond prices are rising today, however, as commodity prices are having a bad day. Either utililty traders are buying utilities in anticipation of higher bond prices. Or they're doing so as a hedge against an overbought market. They're probably buying consumer staples for the same reasons.
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Chart 1
CONSUMER STAPLES ARE ALSO REBOUNDING... Consumer staples and utilities are the two strongest sectors today, and for the week. Chart 2 shows the Consumer Staples SPDR (XLP) surging to a two month high this week. The XLP has climbed back over its 50- and 200-day moving averages; and is challenging a falling trendline drawn over its June/September peaks. Market leadership by consumer staples (and utilities) is usually a sign that investors are turning more defensive on stocks. A slide in commodity prices today, led by base metals and energy, is also weighing on those economically-sensitive stock sectors. That may be contributing to the buying of utilities. Selling in junk bonds may also be contributing to a shift into more defensive assets.
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Chart 2
JUNK BONDS TUMBLE ... The recent selloff in high-yield junk bonds is also attracting a lot of attention. And for good reason. High yield bonds are usually more correlated to stocks than bonds. In other words, they usually trend in the same direction of stocks. Chart 3, however, shows the iBoxx High Yield Corporate Bond iShares (HYG) falling to the lowest level in three months. The HYG may be heading down for a test of its August bottom and its 200-day moving average (red arrow). The yield spread between high yield bonds and Treasuries recently narrowed to the lowest level since the financial crisis. Investors have begun to question whether that narrow yield advantage is enough to compensate for the higher risk in junk bonds. It looks like some have decided that it isn't.
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Chart 3
DOLLAR WEAKENS AS GOLD REBOUNDS... Chart 4 shows the PowerShares Dollar Index Bullish Fund (UUP) falling to the lowest level in nearly a month. Its biggest loss is against the euro, although sterling and the Japanese yen are also bouncing. That may be lending support to gold. Chart 5 shows the Gold SPDR (GLD) rebounding off potential support near its 200-day average. A rebound in gold would also be consistent with a more cautious tone on the stock market.
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Chart 4
