GLOBAL STOCKS ARE HAVING A STRONG DAY -- HIGH YIELD BOND ETF IS BOUNCING SHARPLY OFF CHART SUPPORT -- MOST OF ITS RECENT SELLING HAS BEEN IN THE TELECOM SECTOR -- INDIVIDUAL TELECOM STOCKS ARE REBOUNDING FROM OVERSOLD CONDITIONS
HIGH YIELD BOND ISHARES BOUNCE SHARPLY OFF 200-DAY AVERAGE... The recent selloff in high yield junk bonds has attracted a lot of attention in the financial media. My Tuesday message showed the iBoxx High Yield Corporate Bond iShares (HYG) headed down for a test of chart support at its August low and its 200-day moving average. Chart 1 shows the HYG scoring an upside reversal day yesterday after touching its 200-day average (green circle). That positive action is being followed by a gap higher today. Those are encouraging signs that the selloff in high yield bonds may have run its course. The 14-day RSI line (top of chart) also shows that the HYG had fallen into an oversold condition below 30. One encouraging sign for the junk bond market is that most of its recent selling has been contained mainly in one sector. And that's telecom.
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Chart 1
TELECOM ISHARES HAVE BEEN MARKET'S WEAKEST SECTOR ... The weekly bars in Chart 2 show the U.S. Telecommunications iShares (IYZ) falling to the lowest level since the start of 2016. Its relative performance looks even worse. The gray area in Chart 2 shows a ratio of the IYZ divided by the S&P 500 also plunging throughout the year. The telecom sector has lost -16% this year, making it the market's weakest stock sector. When a sector's stocks are under that kind of downside pressure, some of that selling can spill over to bonds issued by those companies. And telecom accounts for about 25% of high yield bonds. That's what's been causing most of the recent selling in high yield bond ETFs. Fixed income analysts are encouraged by the fact that most of the recent selling in high yield bonds has been limited to that one sector. Stock analysts may be encouraged by the fact that telecom has the smallest sector weighting in the S&P 500 (1.8%). That may explain why stocks in general haven't been that negatively effected by weakness in the telecom group and their bonds. In addition, several of those individual telecom stocks look oversold.
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Chart 2
INDIVIDUAL TELECOM STOCKS LOOK OVERSOLD ... The next five charts show some of the bigger telecom stocks to be in oversold conditions. Chart 3, for example, shows AT&T (T) having fallen to the lowest level since early 2016. Its red 14-day RSI line, however, is rebounding from oversold territory below 30. That's not enough to reverse its overall downtrend. But does suggest that recent selling has been overdone. Chart 4 shows Verizon Communications (VZ) also in very oversold territory. Those are the two biggest stocks in the telecom sector. Downtrends in Sprint (S) and T-Mobile (TMUS) haven't been as deep as the others. Their red RSI lines, however, in Charts 5 and 6 show both stocks also rebounding from oversold conditions. The worst performer in the telecom group is CenturyLink (CTL) which has fallen to the lowest level in eight years. Chart 7, however, shows it too starting to rebound from an oversold condition. Any rebound in those oversold telecom stocks should also relieve pressure on high yield bond ETFs.
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Chart 3
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Chart 4
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Chart 5
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Chart 6
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Chart 7
SMALL CAPS REGAIN 50-DAY AVERAGE ... Stocks are having a good day all over the world today. U.S. stock indexes are having their strongest day in two months. A strong technology sector is pushing the Nasdaq to a new record. Most market sectors are also in the black. A very encouraging sign is coming from today's especially strong performance in small cap stocks. Chart 8 shows the Russell 2000 iShares (IWM) regaining its 50-day line today. The fact that it also found support along its July peak is another positive sign. The Russell 2000 Small Cap Index is the day's biggest percentage gainer. That's a good sign for the entire market. The strong rebound in the high yield bond market may be helping. So might the fact that telecom is today's strongest sector.
