BOND YIELDS CLIMB BACK NEAR RECENT HIGH -- A BOUNCING DOLLAR IS PUSHING COMMODITIES LOWER -- THE RUSSELL 2000 SMALL CAP INDEX IS BOUNCING OFF ITS 200-DAY MOVING AVERAGE -- THE S&P 500 SLIPS INTO THE RED NEAR THE CLOSE IN HEAVIER TRADING
10-YEAR TREASURY YIELD NEARS ANOTHER FOUR-YEAR HIGH ... A plunging stock market earlier in the week caused some safe-haven bond buying which caused bond yields to weaken. Chart 1, however, shows the 10-Year Treasury yield climbing 7 basis points today and very close to another four-year high. The recent upside breakout in bond yields was one of the factors cited as contributing to the past week's heavy stock selling. It remains to be seen if another upside breakout in bond yields would act as a depressant on stock prices which are just starting to recover from Monday's price plunge. The U.S. dollar is also rebounding.
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Chart 1
THE BOUNCING DOLLAR IS PUSHING COMMODITY PRICES LOWER ... Chart 2 shows the PowerShares Dollar Index (UUP) bouncing to the highest level in three weeks. The oversold dollar is still in a long-term downtrend. But this week's bounce is causing profit-taking in commodity prices. Chart 3 shows the Bloomberg Commodity Index threatening its 50-day average. Energy and industrial metals were the day's biggest losers. Falling commodity prices may slow the advance in bond yields.
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Chart 2
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Chart 3
RUSSELL 2000 IS BOUNCING OFF ITS 200-DAY MOVING AVERAGE ... The bouncing dollar may also offer some relief to small stocks. I recently pointed out that the falling dollar favors larger stocks because they can sell more products abroad when the dollar weakens. A bouncing dollar could have the opposite effect by boosting small caps. And that couldn't happen at a better time. Chart 4 shows the Russell 2000 Small Cap Index bouncing off its 200-day moving average this week and chart support along its November low. That's a pretty important support level. That's true not only for small caps, but for the entire market. Any breakdown in small caps is usually a bad sign for the market. An upturn would be positive for both.
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Chart 4
S&P 500 SLIPS INTO NEGATIVE TERRITORY NEAR THE CLOSE ... After recovering two-thirds of Monday's price plunge, late selling pushed major stock indexes into the red for the day. The 5-minute bars in Chart 5 show the S&P 500 slipping below the dashed blue line (previous close) which put it into negative territory. Volume also picked up as prices slid near the close. That suggests follow-through selling tomorrow morning. It's possible that the rise in bond yields and the dollar are taking on toll on stocks, and large cap stocks in particular. The Russell 2000 was the only stock index ending the day in the green. The Nasdaq led the market lower owing to a slide in technology shares. Energy shares were also weak on falling energy prices. Financials saw a modest gain on rising bond yields. Foreign stock ETFs also had a weak day. That may have something to do with the bouncing dollar since most foreign currencies lost ground and foreign stock ETFs are quoted on dollars. The good news is that the VIX Index fell another 11% today to 26.
