WEEKLY SECTOR RANKINGS SHOW A DEFENSIVE MARKET -- SAFE HAVENS WERE MARKET LEADERS -- WHILE TRADE SENSITIVE GROUPS FELL THE MOST -- FINANCIALS WERE THE WEEK'S WORST PERFORMERS -- FALLING BOND YIELDS HAVE HURT BANKS WHILE BOOSTING HOMEBUILDERS
WEEKLY SECTOR RANKINGS SHOW DEFENSIVE MARKET ... The table in Chart 1 plots the relative performance of the eleven market sectors for the week. And they show a generally defensive market. That can be seen by the fact that REITs, utilities, and consumer staples are the three top sectors for the week. The weakest sectors are financials, industrials, cyclicals, technology, and materials. Industrials were led lower by farm machinery producer Deere. Technology was held back by semiconductors with exposure to China. Materials were led lower by trade-sensitive copper and steel stocks. On a brighter note, communication stocks were led by fixed line telecommunications stocks like AT&T and Verizon (see below). A rebound in crude oil supported energy stocks. Drug stocks were the strongest part of healthcare. Consumer discretionary stocks were pulled lower by automotive stocks; homebuilders, however, were the strongest cyclical group (as they've been all year). Asset managers and banks helped make financials the week's worst sector. And therein may lie another theme for the week. And that's the impact of falling bond yields.
IMPACT OF FALLING BOND YIELDS... The 10-Year Treasury yield fell 6 basis points this week to 2.39% which is near the lowest level in more than a year. Naturally, bond prices rose. But so did dividend paying groups like utilities, staples, and REITS. Falling bond yields make dividend paying stocks more attractive. Which helps explain their place at the top of this week's rankings. At the same time, falling bond yields hurt financial stocks, and banks in particular. Which may explain their last place finish this week. Here's another one. Falling bond yields translate into lower mortgage rates which encourages home buying. That has helped make homebuilders the strongest part of consumer cyclicals over the past week and the entire year. And one of the market's biggest gainers.
Chart 1
FALLING BOND YIELDS ARE BOOSTING HOMEBUILDERS ... Homebuilding stocks have been one of the strongest parts of the stock market this year. A big reason for that stronger performance is falling bond yields and lower mortgage rates. The brown area in Chart 2 shows the sharp upturn in the U.S. Home Construction iShares (ITB) that started near the end of December. That upturn followed shortly after the 10-Year Treasury yield peaked during the fourth quarter (green bars). The upturn accelerated after the Fed took a dovish turn during January which pushed yields even lower. Homebuilders have gained 30% since the start of year which is twice as much as the S&P 500 gain 15%. Falling bond yields are usually associated with stronger homebuilding stocks. Unfortunately, they're also usually associated with weaker financial stocks like banks.
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Chart 2
STOCKS END THE WEEK IN THE RED ... Stocks ended the week in the red after three days of gains. Chart 3 shows the Dow Industrials trading between its two moving average lines. Charts 4 and 5 show the S&P 500 and Nasdaq ending back below their 50-day lines; but still above their red 200-day lines. All lost ground for the week. Ten of eleven sectors ended in the red on Friday with bigger losses in industrials, technology, and cyclicals. Deere's 's -7.6% drop helped make industrials the day's weakest sector. Defensive stocks held up better, with utilities the only one in the black. Small caps had a worse week. The Russell 2000 Small Cap Index ended the week below its 200-day moving average (Chart 6). The CBOE Volatility (VIX) Index climbed to 16, but remains below its critical resistance line at 20. Emerging markets led foreign stocks lower. This week's tenuous trading, combined with sector rankings, reflect a generally nervous and defensive stock market.
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Chart 3
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Chart 4
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Chart 5
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Chart 6
AT&T AND VERIZON END ON A STRONG NOTE ... Fixed line telecommunications stocks had a strong week. Chart 7 shows AT&T (T) ending the week near its April high. Chart 8 shows Verizon (VZ) ending the week above both moving averages lines.
BANKS DROP WHILE HOMEBUILDERS GAIN... Chart 9 shows the KBW Bank Index ending the week below its 200-day average. Banks were one of the week's worst performers. While homebuilders were one of the best. Chart 10 shows the U.S. Home Construction iShares (ITB) hitting a 10-month high on Thursday. Falling bond yields probably had something to do with both.
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Chart 7
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Chart 8
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Chart 9
