RAILROAD STOCKS LEAD THE TRANSPORTS AND INDUSTRIAL SECTOR HIGHER -- WIDENING SPREAD BETWEEN 10-YEAR TREASURY AND GERMAN YIELD FAVORS THE DOLLAR -- A RISING DOLLAR IS HURTING GOLD MORE THAN COPPER -- A RISING COPPER/GOLD RATIO IS A SIGN OF CONFIDENCE

RAILROAD STOCKS HAVE BECOME MARKET LEADERS... Two stock groups did better than the rest of the market this week. Transportation stocks had another strong week. As did the Industrial Sector SPDR (XLI) which was the week's strongest sector. Both have one group to thank for their strong performance. And that's railroads which are included in both groups. And the rails have become market leaders in both. Chart 1 shows the Dow Jones US Railroad Index climbing this week to a new record. The rails have been the strongest part of the Dow Transports all year. They've also become leaders in the industrial sector. The solid line in the upper box is a relative strength ratio of the railroad index divided by the Industrial SPDR (XLI). That ratio hit a new high this week. A ratio of the rails divided by the SPX did the same. All of the rail stocks hit record highs this week, and were XLI leaders. Kansas City Southern (KSU) was the week's biggest rail percentage gainer. And achieved an impressive bullish breakout.

KANSAS CITY SOUTHERN ACHIEVES BULLISH BREAKOUT... The weekly bars in Chart 2 show KSU breaking through its 2014 and 2018 highs to a new record. That's a positive sign for that stock, the Dow Transports, and the Industrial sector (XLI).

(click to view a live version of this chart)
Chart 1

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

WIDENING SPREAD BETWEEN TREASURY AND GERMAN YIELD FAVORS DOLLAR ... Yesterday's message showed the Dollar Index (green line in Chart 3) breaking out to a new two-year high. It's biggest gains came from a falling euro. That followed news of economic weakness in the eurozone. As a result, the German 10-year yield fell 6 basis points yesterday, which was twice as much as the 3 bps drop in the 10-Year Treasury. The blue line plots the spread between the 10-Year Treasury yield and the German bund. The chart shows that the direction of that spread has an impact on dollar direction. As a rule, the dollar does better when the premium of Treasuries over bunds is widening. As it's done this week. Yesterday's jump pushed that premium to the highest level in more than a month. Which is helping push money into a stronger dollar and out of a weaker euro.

(click to view a live version of this chart)
Chart 3

COPPER DOING BETTER THAN GOLD IS A GOOD SIGN... While a rising dollar can have a depressing effect on commodity prices, it doesn't effect them all equally. Precious metals like gold usually suffer the most when the dollar is rising. Economically-sensitive base metals like copper are less impacted. That's because copper prices are positively impacted by strong global economic news (and rising stock prices), while gold prices fall out of favor when things are looking strong. The Dollar Index has gained 2.6% since the start of the year. The price of gold has dropped -.4%. The price of copper, however, has risen more than 10% this year. An index of copper miners has gained 27% this year, while gold miners are flat. In addition, the 60-day Correlation Coefficient between gold and the dollar this year is a negative -.50, while copper shows a positive correlation of +.50 to the dollar.

COPPER/GOLD RATIO AND THE STOCK MARKET... The brown line in Chart 4 is a relative strength ratio of copper divided by gold. The solid gray area plots the S&P 500. The point of the chart is to show a relationship between the two. The copper/gold ratio peaked at the start of 2018 just before stocks corrected during the first quarter. The ratio turned up with stocks during the second quarter of that year. The copper/gold ratio peaked again in June and September, and dropped with stocks during that fourth quarter. Defensive money flowed into gold during that stock meltdown while copper weakened. Those trends reversed in 2019 as stock prices turned back up. That explains why the copper/gold ratio has rallied since the start of 2019 along with stock prices. While safe haven gold is losing ground, economically-sensitive copper prices are now rising. With a lot of help from China.

RISING CHINESE STOCKS ARE BOOSTING COPPER... Since China imports about half of the world's copper supply, the direction of that stock market (and economy) have a big infuence on the trend of copper (as well as the global economy). Chart 5 shows a close visual correlation between the Shanghai Stock Index (red line) and the copper/gold ratio (solid area). In other words, the copper/gold ratio usually follows the trend in China. After following Chinese stocks lower last year, the ratio is following them higher this year. That shows growing confidence in the global economy.

Chart 4

Chart 5

HAPPY PASSOVER AND EASTER... On that bright note, I'd like to take this opportunity to wish all of our readers a Happy Passover which starts this evening; and a Happy Easter.