DOW AND S&P 500 ARE POISED TO CLOSE AT RECORD HIGHS -- DROP IN BOND YIELDS CONTINUES TO SUPPORT DIVIDEND-PAYING STOCKS -- CONSUMER CYCLICALS ARE TRADING AT RECORD HIGHS TODAY -- BUT STAPLES HAVE DONE BETTER THAN CYCLICALS SINCE LATE APRIL
S&P 500 SETS NEW RECORD... DOW IS GETTING CLOSE...Stocks are trading higher again today in a shortened pre-holiday trading session. Chart 1 shows the S&P 500 trading well above its late-April high and trading in new record territory again today. The SPX is trading well above its moving average lines which remain in positive alignment. The chart also shows its 20-day average (green line) recently climbing above its 50-day average (blue line) which is another positive sign. The Dow is close to a new record as well.
Chart 2 shows the Dow Industrials also trading above their April high and nearing a challenge of their October intra-day high at 27,000. A close above that previous peak would put the Dow at an all-time high. The October closing high is 26,800; and it's trading above that level today. Which could make today its highest close on record. The Nasdaq is also nearing a new record.
FALLING BOND YIELDS CONTINUE TO BOOST DIVIDEND-PAYERS...Treasury bond yields continue to drop. The weekly bars in Chart 3 show the 10-Year Treasury Yield falling to 1.95% today which is its lowest level since 2016. Not only is that boosting bond prices. But it's continuing to boost dividend-paying stocks like consumer staples, utilities, and REITs which are at or close to record highs. Normally, buying of those defensive stocks would be a sign of caution (which it may well be). A more logical reason, however, may be investors searching for higher yields in a world where bond yields continue dropping. That may explain why those three defensive sectors are among today's strongest groups while major stock indexes are trading at or close to record highs.
Chart 4 shows the Consumer Staples SPDR (XLP) trading in record territory. Chart 5 shows the Utilities SPDR (XLU) nearing a new high as well. Chart 6 shows the Real Estate SPDR (XLRE) doing the same. That doesn't mean that more economically-sensitive stocks aren't also doing well. In fact, consumer cyclicals are also hitting a new record today.
CONSUMER DISCRETIONARY SPDR HITS NEW RECORD... Chart 7 shows the Consumer Discretionary SPDR (XLY) climbing above its late-April peak to hit a new record today. [The Technology SPDR (XLK) hit a new record earlier this week]. It may seen strange to see consumer cyclicals and consumer staples hitting new records on the same day. And it usually is. But that's the mixed message we're getting in a world of falling bond yields.
One way to gauge market strength is to compare the relative performance of staples and cyclicals with ratio analysis. The black line in Chart 8 is a relative strength ratio of the Consumer Staples SPDR (XLP) divided by the Consumer Discretionary SPDR (XLY) over the past eighteen months. The green area shows the direction of the 10-Year Treasury yield. The ratio spiked during the fourth quarter as stocks sold off and investors fled to safer haven stocks. The ratio fell during the first quarter of this year as stocks rallied. Yields also started falling during the fourth quarter, and have continued falling since then. Since late April, however, the rising ratio has swung back in favor of more defensive staples. That's when trade tensions resurfaced and bond yields took another tumble.
STAPLES HAVE DONE BETTER SINCE LATE APRIL...Notice that the latest plunge in bond yields that started in late April (green arrow) coincided with an upturn in the staples/cyclicals ratio (black arrow). Both sectors have risen to new highs since then; but staples have risen more. That's unusual in a strong stock market. But maybe not when bond yields are plunging.
