STOCK INDEXES ARE FAILING TEST OF 200-DAY MOVING AVERAGES -- THE DOW MAY ALSO SLIP BACK BELOW ITS RED LINE -- FALLING BOND YIELDS ARE BOOSTING UTILITIES AND OTHER DEFENSIVE SECTORS -- WHILE A RISING DOLLAR IS HURTING ENERGY AND MATERIAL STOCKS
200-DAY MOVING AVERAGES CONTAIN THE RECENT RALLY... With stocks losing ground over the past two days, it looks like the 200-day averages that we've all been watching have managed to contain the 2019 rally. Chart 1 shows the S&P 500 pulling back from that red overhead resistance line and in danger of losing ground on the week. That's not too surprising considering the steepness of the recent rally which put stock indexes in a short-term overbought condition. My Tuesday message showed its 14-day RSI line approaching overbought territory near 70. That line has turned down. The upper box in Chart 1 shows the more sensitive 9-day RSI line falling to the lowest level in a month after reaching overbought territory above 70. That also shows loss of upside momentum. The lower box shows daily MACD lines in danger of turning negative for the first time in a month. All of which suggests that the early 2019 stock rally has failed its first attempt to regain its 200-day moving average. The Nasdaq Composite Index is in a similar situation. The Dow Industrials are in danger of falling back below their red resistance line today.
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Chart 1
DOWDUPONT, INTEL, AND CATERPILLAR WEIGH ON THE DOW ... The Dow was the only major U.S. stock Index to exceed its 200-day line. Chart 2, however, shows it in danger of ending the week back below that key resistance line. [One of the requirements for an upside breakout to be valid is for prices to hold the breakout. The Dow's upside breakout is being tested today]. Not surprisingly, some of its weakest stocks today are economically-sensitive stocks tied to the global economy and trade. Chart 3 shows Dow DuPont (DWDP) nearing a test of its December low. Stocks tied to materials and energy are also being hurt by a rising dollar (more on that shortly). Chart 4 shows Intel (INTC) falling back below its 200-day line. Semiconductor stocks are also under pressure today which threatens their recent upside breakout. Chart 5 shows Caterpillar (CAT) in danger of falling below its 50-day line. That's after failing a test of its more important 200-day average in mid-January.
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Chart 2
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Chart 3
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Chart 4
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Chart 5
FALLING BOND YIELDS SUPPORT RISING UTILITIES ... Another negative sign for stocks is that defensive groups like utilities, staples, and REITs are among the day's strongest, while some of the weakest include energy, materials, financials, and cyclicals. My Wednesday message suggested that falling Treasury bond yields were supporting bond prices along with defensive stock groups that pay dividends. The green bars in the upper of box of Chart 6 show the 10-Year Treasury yield nearing its lowest level of the year. The TNX is falling with bond yields in Europe on more signs of economic weakness in that region (more on that shortly). Utility stocks are usually the most closely tied to the direction of bond prices which are also rising. The black bars show the Utilities Sector SPDR (XLU) trading at the highest level in two months. They're the only sector in the black today. Falling bond yields also explain why banks and other financial stocks are doing worse than the rest of the market.
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Chart 6
DOLLAR RISES AGAINST EURO ... Another sign of global caution is that money has started to flow back to the safety of the U.S. dollar. The green bars in Chart 7 show the U.S. Dollar Index (UUP) climbing to the highest level in two months. A rising dollar usually has a depressing effect on stocks tied to commodities like energy and materials which are especially weak today. [Gold is the lone exception and is gaining ground because of its safe haven appeal]. Most of the dollar's gain is coming against the British pound and the euro. The blue bars in Chart 7 show the euro weakening. New signs of economic weakness in the eurozone economy (especially in Germany) are hurting that region, while Brexit problems are weighing on growth in the UK. Those signs of global weakess are another negative sign for stocks. And are one of the reasons Treasury yields are falling along with those in Europe. It may seem unusual to see the dollar rising while Treasury yields are dropping. The reason for that is because yields in the U.S. are falling more slowly than in Europe. Ten-year Treasury yields have dropped 10 basis points over the last month versus 14 and 17 bps drops in Germany and the UK. That's why their currencies are weaker than ours. And why the U.S. dollar is rising.
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Chart 7
THE VIX IS FINDING SUPPORT AT ITS 200-DAY LINE ... We can't end today's message without pointing out that while stock prices are meeting resistance at their 200-day moving averages, the Volatility (VIX) Index is trying to find support at its 200-day line. The daily bars in Chart 8 show the VIX trying to end the week back over its 200-day average (red line). The VIX is also trying to stay above previous support lows near 16 formed between November and early December. That's an important test for the VIX and the stock market. Since they trend in opposite directions, any serious rebound by the VIX from its 200-day average would increase the odds of more stock selling near their 200-day lines. And could signal a renewal of stock market volatility.
