STOCK INDEXES HIT NEW RECORDS ON REPORT OF TRADE AGREEMENT -- SMALL CAPS HIT NEW 52-WEEK HIGH -- WHILE FINANCIALS, TECH, AND HEALTHCARE HIT NEW RECORDS -- BIG JUMP IN BOND YIELDS BOOSTS FINANCIALS BUT HURTS BOND PROXIES -- MATERIALS SPDR HITS ANOTHER HIGH
STOCK INDEXES HIT NEW RECORDS...Reports of a trade agreement between the U.S. and China pushed global stock prices sharply higher today. Chart 1 show the S&P 500 reaching record territory. So did the Nasdaq. Small cap stocks continued to show relative strength. Chart 2 shows the Russell 2000 iShares (IWM) hitting another 52-week high. Eight of eleven stock sectors rose today with financials, technology, and healthcare hitting new records. Energy stocks also had another strong day. While materials hit the highest level in nearly two years (more on that shortly). The three sectors in the red were staples, utilities, and REITS. Those bond proxies were also hurt by a big jump in bond yields which pushed the 10-Year Treasury yield to the highest level in a month. Chart 3 shows the 10-Year Treasury yield jumping 10 basis points to 1.90%. That helped make financials the day's strongest sector which were led higher by banks, life insurers, and asset managers.
MATERIALS SPDR ACHIEVES BULLISH BREAKOUT...The weekly bars in Chart 4 shows the Materials SPDR (XLB) rising today to the highest level since the start of 2018. The XLB just recently achieved a bullish breakout by rising above previous highs reached this year and most of 2018. Today's gains were led by stocks tied to aluminum, paper, commodity chemicals, and copper. The copper index hit another eight-month high as copper prices gained more ground. Gold stocks lagged behind as the precious metal weakened. Rising stocks, higher bond yields, and a stronger dollar were too much for the yellow metal. I've made the point in previous messages that the recent upturn in stocks tied to economically-sensitive commodities looks like a vote of confidence in the global economy. That may also explain recent buying of energy shares as the price of crude oil has strengthened.
Chart 5 shows the Energy SPDR (XLE) moving up to challenge its 200-day moving average; and maybe even its November high. Closes above them would certainly be a sign that the XLE could be bottoming. Energy has been the year's weakest market sector. But it's the strongest sector over the past week. I can't help but wonder if new buying in energy stocks may also be tied to a stronger outlook for the global economy. That could explain why investors have taken a new interest in energy and materials stocks which have been market laggards all year. They may start getting some help from rising emerging markets. And China in particular.
EMERGING MARKETS MAY BE BREAKING OUT...My weekend article suggested it would probably take a stronger Chinese stock market to support higher commodity prices (and stocks tied to them). That's because China is the world's biggest buyer of commodities. That's why today's last chart may be very encouraging for commodity traders. Chart 6 shows the MSCI Emerging Markets iShares (EEM) climbing 1.74% today to lead the global rally. More importantly, the EEM closed above its April high to reach the highest close in eighteen months. That could be signalling a major bottom in emerging markets. Today's EEM gains were led by stocks in China, South Korea, and Taiwan. That was most likely a response to today's trade news. Brazil and Russian stocks have also been leading the EEM rally. Brazil is a big exporter of commodities; while Russia is closely tied to energy markets. All of which may help explain the world's recent interest in economically-sensitive metal and energy markets and stocks tied to them.
