TREASURY PRICES ARE TESTING OVERHEAD RESISTANCE -- RISING BOND PRICES ARE BOOSTING UTILITIES AND REITS AT THE EXPENSE OF FINANCIALS -- FINANCIAL/UTILITY RATIO HAS BEEN FALLING THIS YEAR -- BUT IS TESTING TRENDLINE SUPPORT
BOND ETF IS TESTING OVERHEAD RESISTANCE ... Treasury bond prices have been climbing since the middle of May. And they've reached an important chart point. Chart 1 shows the 7-10 Year Treasury Bond iShares (IEF) in the process of testing overhead resistance along their early April/late May peaks, and their 200-day moving average. The 20-year T-bond ETF (TLT) has already cleared both barriers. The shorter maturity ETF in Chart 1, however, is more closely tied to the benchmark 10-year Treasury yield which peaked in May and has been moving sideways since then. What the IEF does from here will help determine the direction of bond yields in general. And that could have an impact on a number of rate-sensitive market sectors.
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Chart 1
BOND PRICE 2016 PEAK IMPACTED VARIOUS SECTORS... The green weekly bars in Chart 2 show the same 7-10 Year Treasury Bond iShares (IEF) peaking in the middle of 2016 (which also marked the bottom in Treasury yields). In the two years since then, the S&P 500 has risen 33%. What we're looking at here is the relative performance of three rate-sensitive market sectors since then. The second strongest sector since July 2016 has been financials (behind technology). The top box shows the XLF/SPX ratio gaining 21% since bond prices peaked in July 2016 (and yields bottomed). That means that financials outpaced the S&P 500 by 21% during that two-year period. That makes sense since financial stocks usually benefit from rising bond yields (and falling bond prices). Two of the weakest sectors were utilities and REITs. [Only consumer staples, which can also be hurt by rising rates, were weaker]. The bottom two boxes show utilities and REITs underperforming the S&P 500 by -26% and -28% respectively since 2016. That also makes sense because those sectors are bond proxies which were hurt by falling bond prices. Which demonstrates that the direction of bond prices (and yields) largely determines the performance of those three sectors. Which is why the current test of overhead resistance by bond prices in Chart 1 takes on more importance.
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Chart 2
A LOOK AT ALL THREE SECTORS ... Chart 3 shows the Financial Sector SPDR (XLF) trying to clear a falling trendline drawn over its January/March highs. Financials have lagged behind the S&P 500 this year. A pullback in bond yields is one reason why. Chart 4 shows the Utilities Sector SPDR (XLU) reaching the highest level this year. It's getting some help from higher bond prices (green area). So is the Real Estate Sector SPDR (XLRE) in Chart 5 which recently hit a 52-week high. Utilities and REITs usually trend in the same direction as rising Treasury bond prices. Both of those bond proxies have done better than financials this year. But the relationship between financials and utilities may have reached an important testing point.
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Chart 3
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Chart 4
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Chart 5
FINANCIAL/UTILITIES RATIO IS TESTING TRENDLINE SUPPORT... The black line in Chart 6 is a "ratio" of the Financial SPDR (XLF) and the Utilities SPDR (XLU) over the last two years. The green line plots the 10-Year Treasury Yield ($TNX). Both lines usually trend in the same direction. Rising bond yields since the middle of 2016 have caused financials to outperform utilities. During 2018, however, a pullback in bond yields has caused financials to underperform. Notice, however, that the falling ratio is now testing a rising trendline drawn under its 2016/2017 lows. That would be a logical chart spot for the financials to start doing better. For that to happen, however, the green line (TNX) needs to start climbing as well. The recent drop in commodity prices may be one of the factors weighing on bond yields (and boosting bond prices). The price of copper fell today to the lowest level in a year (as did the Chinese yuan). A rising dollar is also pushing commodity indexes lower. That scenario usually favors bond prices and bond proxies. And may help explain why utilities and REITs are today's two strongest sectors, while financials are the weakest.
