STOCKS TRADE SIDEWAYS BUT END WEEK SLIGHTLY HIGHER -- FALLING CRUDE OIL MADE ENERGY THE WEAKEST SECTOR -- WHILE FALLING BOND YIELDS MADE UTILITIES THE STRONGEST -- INTERMARKET ANALYSIS SUGGESTS THOSE TWO TRENDS ARE LINKED

UTILITIES WERE WEEK'S STRONGEST SECTOR WHILE ENERGY WAS THE WEAKEST... Stocks ended the week with small gains while continuing to trade in a sideways consolidation pattern. Technology stocks showed relative strength thanks to a strong semiconductor group. So did consumer cyclicals which were led higher by apparel retailers. Transportation stocks gave the industrial sector a boost for the week. The two most notable moves during the week came from energy and utilities. Energy lost -4.5% which made it the weakest sector, while utilities gained 3% making the week's strongest sector. Their relative performance can be seen in Chart 1. Both are plotted "relative" to the S&P 500 (flat black line). Their divergent performances makes sense. Rising energy prices have boosted inflation expectations which recently pushed the ten-year Treasury yield to a seven-year high. That pushed bond proxies like utilities lower and energy shares higher. This week's plunge in crude oil and bond yields, however, reversed those trends. Utilities went from laggards to leaders, while energy shares did the opposite.

Chart 1

CRUDE OIL DROPS ON EXPECTED PRODUCTION BOOST... The price of crude oil tumbled -4.9% this week on reports that Saudi Arabia and Russia are planning to raise oil production. Production cuts by OPEC and Russia have supported rising oil prices over the past year. So it's no surprise that plans to boost production pushed prices lower this past week. Chart 1 also suggests that a pullback was probably due anyway. Although the price of Light Crude Oil ($WTIC) climbed above $72 for the first time in more than three years, its 14-day RSI line (top box) failed to confirm that move to new highs and formed a short-term "negative divergence" from the rising price action (black arrow). It slipped below 50 on Friday suggesting more weakness ahead (circle). The big question is how much weakness. Chart 1 shows the last upleg in crude oil that started in mid-2017. The rising trendline drawn under its August/February lows may be tested. Whether or not it holds will help determine of the price of oil is just undergoing a normal setback, or something more serious. If that line doesn't hold, the next support levels that could be tested range from $62 to $58. That would be bad for energy shares. But it could give a boost to bond holders by pulling bond yields lower. And holders of utilities.

(click to view a live version of this chart)
Chart 2

TEN-YEAR TREASURY YIELD TUMBLES WITH OIL ... It should come as no surprise to see bond yields tumbling this week along with crude oil. Both markets have been trending higher together over the past year (with a 60-day Correlation Coefficient of .77). And both have similar chart patterns. The daily bars in Chart 3 shows the 10-Year Treasury Yield ($TNX) falling 13 basis points this past week. [Its weekly percentage drop of -4.4% nearly matches the -4.9% drop in oil]. Chart 3 also shows its 14-day RSI line (top box) failing to confirm the recent move to new highs which formed a "negative divergence" (similar to the one on crude oil). It also slipped below the zero line on Friday. The TNX is now testing its first line of support near 2.91% and its 50-day average (blue line). If that doesn't hold, a further drop toward its early April bottom (2.71%) could be in store.

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Chart 3

TEN-YEAR YIELD UPTREND STILL INTACT ... Chart 4 shows that the uptrend in the 10-Year Treasury yield from last September is still very much intact, but probably due for a setback. The previous chart showed the next level of major chart support at its early April low near 2.71% (see circled area). This chart shows that a drop to that support level would represent a 38% Fibonnaci retracement of the nine-month uptrend (upper line) which is pretty normal in an ongoing uptrend. Whether or not the TNX drops that low and what it does from there may depend on how much the price of crude oil drops.

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Chart 4

ENERGY/UTILITY RATIO IS ALSO DUE FOR A CORRECTION... We'll end up today where we started, which is a comparison of energy and utility shares. Chart 5 plots a "relative strength ratio" of the Energy SPDR (XLE) divided by the Utilities SPDR (XLU) over the past three years. The rising ratio since last summer has clearly favored energy over utilities shares. That's because energy prices were rising along with bond yields, while bond prices were falling. The chart, however, shows the ratio running into resistance along its late 2016 high and starting to weaken (see arrows). That doesn't mean its uptrend is being reversed. It's more likely a sign of that uptrend undergoing a normal retracement. That would suggest more short-term terms gains in utilities and losses in energy shares. How long that lasts will largely depend on how far the price of crude oil drops along with bond yields.

(click to view a live version of this chart)
Chart 5

HAPPY MEMORIAL DAY ... Have a great Memorial Day weekend which is the unofficial start of summer. Enjoy the sun along with the hog dogs and hamburgers. But please take a moment to reflect on who and what the day is meant to memorialize.