STOCK INDEXES END WEEK AT RECORD HIGHS -- SECTOR RECORDS WERE SET BY CONSUMER DISCRETIONARY AND TECHNOLOGY -- INDUSTRIALS MAY BE GETTING CLOSE TO A RECORD AS WELL -- TRANSPORTATION STOCKS END ON A STRONG NOTE -- FINANCIALS HIT NEW HIGH FOR THE YEAR
U.S. STOCK INDEXES SET NEW RECORDS...The three major U.S. stock indexes ended the week in record territory. A number of sectors hit records as well, or are getting close to doing so. Consumer discretionary and technology SPDRs hit new records. Financials hit a new high for the year (more on that shortly). Industrials were Friday's strongest sector, and are getting close to a new record of their own. The weekly bars in Chart 1 show the Industrial SPDR (XLI) nearing a test of previous highs formed during 2018 and this April. The shape of the chart suggests that an upside breakout appears likely. The histogram bars in the upper box plot the XLI/SPX ratio and show that industrials have been market laggards during the first half of the year. That may start to change for the better. And that may have a lot to do with a stronger performance from transportation stocks.
Transportation stocks are included in the XLI, and provided a big part of Friday's XLI gains. The daily bars in Chart 2 show the Dow Transports jumping more than 2% on Friday making them one of the day's strongest groups. The circled area also shows them ending the week well above their 50 and 200-day moving averages. Transportation leadership came from truckers, delivery services, and airlines. Trucker J.B. Hunt (JBHT) was the biggest percentage gainer in the XLI. Airlines stocks are also starting to take off. The daily bars in Chart 3 show the Dow Jones Airlines Index breaking out to a new high for the year.
New buying in transportation shares is an encouraging sign for one of this year's weakest stock groups. With the Dow Industrials hitting a new record, it's encouraging to see the Dow Transports having a strong week as well. Transports have lagged behind industrials this year on a relative basis. Followers of Dow Theory like to see both of them rising together.
FINANCIAL SPDR HITS NEW HIGH FOR THE YEAR... Financial stocks also had a strong week. The weekly bars in Chart 4 show the Financial SPDR (XLF) closing at the highest level since last September. The histogram bars shows their relative performance also starting to improve. Most of this week's leadership came from insurance and investment service stocks. In the latter group, the weekly bars in Chart 5 show Goldman Sachs (GS) rising to the highest level since last November. Its relative strength ratio (solid line) is also starting to improve. Bank stocks, which are the biggest part of the XLF (41%), didn't gain much this week. But are at least holding their own. They may have gotten a late boost from this week's rebound in Treasury bond yields.
The daily bars in Chart 6 show the KBW Bank Index trading sideways most of the week before gaining ground on Friday (see circle). It also remains above its moving average lines. Its Friday bounce may have to do with a rebound in bond yields following a stronger-than-expected CPI inflation report for June. And a drop in short-term yields following testimony by Jerome Powell reinforcing expectations for a July rate cut. That combination had the positive effect of steepening the yield curve.
The upper box in Chart 6 shows the spread between the 10-year and 3-month Treasury yields still in negative territory (red area), which reflects the inverted yield curve that has worried economists and the Fed. [That occurs when the 3-month yield is higher than the 10-Year). The spread, however, has risen to the highest level in nearly two months, and is only 3 basis points away from crossing above its zero line to turn positive (the 10-year yield higher than the shorter yield). That could be good sign for banks because a steeper yield curve increases their net interest margin. That allows them to charge more for loans than they pay out to their depositors. That may explain this week's stronger performance in financial stocks. And why banks ended the week on a stronger note.
