TESTING OF 200-DAY AVERAGES CONTINUES -- THE SPX AND QQQ ARE TESTING IT NOW -- XLI AND XLY ARE ALREADY ABOVE -- WHILE THE XLC IS STALLING AT ITS RED LINE -- TREASURY YIELDS AREN'T FOLLOWING STOCKS HIGHER WHICH GIVES MIXED MESSAGE ON INVESTOR CONFIDENCE
S&P 500 AND NASDAQ ARE TESTING 200-DAY AVERAGES ... It seems that everyone is watching 200-day moving averages. That's because the strong rebound since the end of December has pushed major U.S. stock indexes back to that overhead resistance line. What they do there should help determine if the 2019 rally starts to fail, or if there's more upside to come. A decisive close above that long-term line would also reduce the odds that stocks entered a bear market late last year, or are about to enter one this year. Bear markets can only exist when prices are trading below that long-term support line. The Dow Industrials have already crossed back above its red line. Chart 2 shows the S&P 500 in the process is testing it right now. Chart 2 shows the Nasdaq Composite also nearing a test of its red line. Their strong rebound since Christmas, however, has left them in an over-extended (or overbought) condition with may work against them over the short run. We may know by the end of the week how the test works out.
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Chart 1
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Chart 2
XLI AND XLY SPDRS CROSS RED LINES -- WHILE THE XLC IS STALLING THERE... A number of sector ETFs are undergoing tests of their own. Chart 3 shows the Industrial Sector SPDR (XLI) moving up to test its late December intra-day high at 74.00 after crossing its red line. Chart 4 shows the Consumer Discretionary SPDR (XLY) trying to hold its recent upside breakout. Chart 5 shows the Communication Services SPDR (XLC) stalling at its red line. The XLC is also meeting some resistance along its early November high. Interestingly, sector SPDRs that are already above their 200-day lines are consumer staples (XLP), utilities (XLU), healtchare (XLV), and REITS (XLRE). And the XLRE has reached a new record. All four of those leading groups are defensive in nature. Which suggests that investors are keeping their defenses up while buying into more economically-sensitive sectors. That may have something to do with the fact that bond yields are still dropping.
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Chart 3
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Chart 4
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Chart 5
STOCKS AND BOND YIELDS DIVERGE ... One of the reasons why current sector rotations are a bit unusual may be explained by the next chart. Chart 6 compares the 10-Year Treasury Yield (green bars) to the S&P 500 (black bars) over the last eight months. The black bars show the S&P 500 peaking at the start of October, while the TNX peaked around the same time before turning down during November. That made sense since fears of a slowing global economy had a lot to do with fourth quarter stock selling (and bond buying). Since the start of 2019, however, Treasury yields have stayed down (and remain below moving average lines) while stock prices have risen. Part of the flatter yield is due to the Fed's more dovish tone last month, which also helped boost stock prices. But their divergence is still a little unusual. A stronger economy should boost bond yields as well as stocks, and encourage some bond selling. So far, that hasn't happened. While a stronger stock market encourages buying of riskier stock groups like industrials and cyclicals; lower bond yields encourage the buying of defensive stock groups like staples, utilities, and REITS. Hence the mixed sector performance since the start of the year. Sooner or later, one of those two stock groups should win out. And that should help determine the direction of the stock market itself. At the same time, bond yields and stocks may start moving in the same direction again.
