PLUNGING BOND YIELDS SEND SIGNAL OF ECONOMIC WEAKNESS -- S&P 500 FALLS BELOW 200-DAY AVERAGE AFTER FAILING TEST OF NOVEMBER HIGH -- BIGGEST LOSERS ARE BANKS, SMALL CAPS, SEMIS, AND TRANSPORTS -- UTILITIES HIT NEW HIGHS AND ARE THE ONLY WINNERS
TEN-YEAR TREASURY YIELD PLUNGES BELOW ITS 200-DAY AVERAGE ... Chart 1 shows the 10-Year Treasury yield plunging to the lowest level in three months and falling below its 200-day average for the first time in more than a year. That means that investors are putting a lot of money into Treasury notes and bonds today. That's normally a sign that investors are losing confidence in the U.S. economy. It also increases fears of an inverted yield curve which happens when longer term yields fall below shorter ones. In the past, inverted yield curves have been early warning signs of a recession. Stocks are being sold off hard today. Two groups in particular are worth noting. Financials are the day's weakest sector and are being led lower by banks. That's because falling bond yields are usually bad for financials. Chart 2 shows the Financials Select SPDR (XLF) off sharply today after failing a test of its 200-day average. At the same time, utilities are the day's strongest sector. Chart 3 shows the Utilities Sector SPDR (XLU) hitting a new high. Dividend-paying utiities usually benefit from falling bond yields. So do consumer staples, drug stocks, and REITS which are also holding up relatively well. Groups being hit the hardest are economically-sensitive consumer cyclicals (like retailers), small caps, semiconductors, and transports (like delivery service stocks). That's another vote of no confidence in economic growth.
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Chart 1
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Chart 2
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Chart 3
S&P 500 FALLS BACK BELOW ITS 200-DAY AVERAGE... Chart 4 shows the Dow industrials falling below the upside gap formed yesterday on the weekend trade truce between the U.S. and China. That's a negative chart sign. The Dow is now bearing down on its 200-day moving average. Chart 5 shows th S&P 500 already trading below that long term support line. Chart 6 shows the Nasdaq Composite Index backing off from a test of its 200-day line. Today's heavy stock selling raises the likelihood that the major stock indexes have failed a test of their early November highs. That would also make the chances for a Santa Claus rally a lot less likely. It appears that investors are buying Treasury bonds instead of stocks for the holidays. And raising come cash.
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Chart 4
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Chart 5
