RISING BOND YIELDS BOOSTS FINANCIAL STOCKS -- FINANCIAL SPDR LEADS MARKET HIGHER -- GOLDMAN SACHS SETS A NEW RECORD -- VERIZON SURGE LEADS TELECOM HIGHER -- AT&T CLEARS ITS 200-DAY AVERAGE -- EDISON INTL WEIGHS ON UTILITY SECTOR
BOND YIELD IS CLIMBING... The daily bars in Chart 1 show the 10-Year Treasury Yield climbing 2 basis points to 2.40%. The 5-year Treasury Yield (not shown) has climbed to the highest level in six years. Today's strong PPI report may have something to do with that. November's Producer Price Index showed an annual inflation rate of 3.1% which is the highest number in five years. That makes tomorrow's Fed decision to hike rates even easier. More importantly, higher inflation numbers could lead to a more aggressive Fed stance during 2018. British bond yields are also higher today. Britain's inflation rate also exceeded 3% today. That central bank meets on Thursday. As usually happens when rates rise, bank stocks are having a very strong day. Utility stocks are falling along with bond prices. It should be noted, however, that utilities are also being weighed down by Edison Intl. (EIX) which has heavy exposure to the fire raging in Southern California. Weak chip stocks are causing the Nasdaq market to lag behind the Dow and S&P 500.
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Chart 1
FINANCIAL SPDR HITS NEW RECORD ... Financial stocks continue to lead the rest of the market higher. The daily bars in Chart 2 show the Financial Sector SPDR (XLF) hitting a new record high. Its relative strength ratio (top of chart) has reached the highest level since 2008. Rising interest rates, tax reform, and less regulation are all working in their favor. As usual, bank stocks are in the forefront of the financial gains. Goldman Sachs (GS) is today's biggest percentage gainer in both the XLF and the Dow. Chart 3 shows the stock climbing above its spring high to reach a new record. JP Morgan Chase (JPM) also hit a new record.
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Chart 2
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Chart 3
VERIZON LEADS TELECOM HIGHER... A month ago it seemed like everyone was concerned by the weakness in telecom stocks, and the negative effect that was having on high yield bonds. Not anymore. Chart 4 shows Verizon (VZ) surging today to the highest level since the summer of 2016 and on the verge of a new record. Its falling relative strength ratio (top of chart) shows how weak the telecom giant has done versus the S&P 500 over the last eighteen months. The ratio, however, has risen above the falling trendline extending back over that period. That's a good sign that the long period of poor performance has ended. That's not the only telecom giant rallying today. Chart 5 shows AT&T (T) gaining 3% today which is enough to push it above its 200-day average. It still needs to clear falling trendlines on the daily price bars and its relative strength ratio (top of chart). But this is the stock's strongest performance for the year. One of the reasons for the sudden interest in telecom may be that the group has the second highest effective tax rate of 33.7% (which is second only to retailer's rate of 35%). That puts telecom in the forefront of domestic stock groups that stand to benefit the most from a tax cut. Their strength over the last month has also helped high yield bonds recover most of their November losses.
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Chart 4
