STOCKS RECOVER FROM HIGHER INFLATION REPORT -- NASDAQ 100 IS FIRST INDEX TO REACH 50-DAY LINE -- BANK ETF GAINS MORE GROUND ON RISING YIELDS -- WHILE UTILITIES FALL -- JUMP IN GOLD PUTS IT CLOSER TO MAJOR UPSIDE BREAKOUT -- VIX DROPS TO 20
MAJOR STOCK INDEXES BOUNCE BACK FROM EARLY SELLING ... January's CPI report came in higher than expected and caused stocks to open lower. The headline reading of 2.1% and core reading (excluding food and energy) of 1.8% were higher than economists were expecting. After opening lower, stocks regained their footing and are now in positive territory for the day. The 10-minute bars in Chart 1 show the morning selloff in the Dow Industrials holding above yesterday's intra-day lows near 24,500 before turning higher. That's keeping the rally that started last Friday intact. Chart 2 shows the S&P 500 also holding above initial support before moving to new high ground. Chart 3 shows the Nasdaq Composite doing even better. That puts the Nasdaq market in the lead. The Nasdaq 100 is the first of the major stock indexes to reach and exceed its 50-day moving average.
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Chart 1
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Chart 2
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Chart 3
NASDAQ 100 IS THE FIRST STOCK INDEX TO CLEAR ITS 50-DAY LINE... The daily bars in Chart 4 show the PowerShares QQQ trading above its 50-day average. It's the first major stock index to do that. The QQQ is being driven higher by internet and semiconductor stocks which are helping make technology one of the day's strongest sectors. The Nasdaq may also be benefitting from a 2% jump in biotech stocks. A close over the 50-day line would be a positive sign for the Nasdaq and the market as a whole. I mentioned yesterday that the next upside target for the S&P 500 would be last Wednesday's intra-day high at 2727 and its 50-day average (currently at 2720). Those two chart points can be seen in the daily bars in Chart 5.
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Chart 4
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Chart 5
BANKS RALLY WHILE UTILITIES FALL ... Today's higher inflation report is pushing interest rates higher all along the yield curve, with the 10-Year Treasury Yield reaching 2.90% for the first time in four years. One of the factors pushing bond yields higher has been early signs of rising inflation. Today's CPI report appears to be confirming the view that inflation is starting to rise for the first time in years. As we've pointed out many times in previous messages, rising rates are good for financial stocks, and banks in particular. Yesterday's message showed the S&P Regional Banking SPDR (KRE) trading above its 50-day average. The blue circle in Chart 6 shows it doing that in more decisive fashion today. Banks are one of the day's strongest groups. Not surprisingly, the day's two weakest sectors are bond proxies like utilities the REITs. Both sectors are falling with bond prices today. {Consumer staples are also in the red}. The red bars in Chart 6 show the Utilities SPDR (XLU) falling while bank stocks have been rising. That's what happens when bond yields rise and bond prices fall. Investors have been buying Treasury Inflation Protected Securities (TIPS) as a hedge against rising inflation. They're buying gold today for the same reason.
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Chart 6
GOLD SURGES ON INFLATION HEDGE AND WEAKER DOLLAR ... The gold market is on fire today. A weaker dollar is helping. But today's higher inflation report is probably the main reason why investors are catching gold fever. Buying gold is one of the most traditional ways of hedging against rising inflation. The daily bars in Chart 7 show the Gold Shares SPDR (GLD) surging the equivalent of $18 today (+1.4%) after finding support near its 50-day average. That puts GLD in position to challenge its January intra-day high which was the highest gold price in eighteen months. An upside breakout through that high would have longer-range bullish implications for the yellow metal. The next chart shows why. The weekly bars in Chart 8 show that GLD is also nearing another test of a major "neckline" extending back four years in what appears to be a major basing pattern. A decisive close above its January high would also push the price of gold above that major resistance line (see circle). An upside breakout in gold would be another sign of expectations for higher inflation to come. Investors are also buying gold shares which are rising 4% today. The fact that gold shares are rising more than bullion (on a percentage basis) is a positive sign for both. Gold isn't the only commodity rising today. A falling dollar is giving a big boost to the Bloomberg Commodity Index and has pushed it back above its 50-day average.
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Chart 7
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Chart 8
VIX GAPS DOWN TO 20 LEVEL... Another good sign for the stock market is that volatility continues to fall. The 30-minute price bars in Chart 9 show the CBOE Volatility (VIX) Index gapping 20% lower today to 20 which puts it below last week's intra-day low (red circle). A reading below its historical average at 20 would be an even more positive development for stocks. Interestingly, the VIX fell this morning even as stock prices were retreating. I'm not sure why but I take it as a positive sign. That's because a lower VIX reading is usually a positive sign for the stock market.
