U.S. AND CHINA SIGN PHASE ONE OF TRADE DEAL -- MAJOR STOCK INDEXES HIT NEW RECORDS -- LOWER BOND YIELDS BOOST UTILITIES AND REITS -- BANKS HIT OVERHEAD RESISTANCE -- HOME CONSTRUCTION ISHARES HIT NEW RECORD
SIGNING OF TRADE DEAL BOOSTS STOCKS... Stocks celebrated the U.S. and China signing phase one of their historic trade deal today with the three major stock indexes hitting another record high. Despite some late selling this afternoon, stock indexes ended in positive territory. Stock indexes are still dealing with overbought readings on a number of short-term technical indicators. Eight of eleven stock sectors gained ground today with four of them hitting new records. Two of the records, however, were reached by defensive consumer staples and utilities; while some of the more economically-sensitive groups like cyclicals and financials lagged behind. Utilities and REITs were two of the day's strongest sectors. That may have a lot to do the recent dip in bond yields.
LOWER BOND YIELDS BOOST BOND PROXIES... Chart 1 show the Utilities Sector SPDR (XLU) breaking out into record territory. Chart 2 shows the Real Estate Sector SPDR (XLRE) rising to the highest level in three months. My weekend message suggested that the recent drop in bond yields could bring some buying back into those two bond proxies. It also suggested that lower bond yields could start to weigh on bank stocks. Financials were one of the day's weakest sectors; and bank stocks are the main reason why.
BANK INDEX SLIPS BELOW 50-DAY LINE... Chart 3 shows the KBW Bank Index slipping below its 50-day average after some disappointing bank earnings today. And another dip in bond yields. The 10-Year Treasury yield has dropped from 1.95% to below 1.80% over the last three weeks. That has also caused the yield curve to flatten a bit which is a potential negative for banks. The decline in bond yields so far isn't big enough to seriously threaten the bank uptrend (more on that shortly). But bank stocks may have some other technical issues to deal with.
BANK RESISTANCE... The weekly bars in Chart 4 show the KBW Bank Index pulling back from overhead resistance formed during the spring and summer of 2018 (red horizontal trendline). In addition, its 9-week RSI line (upper box) is pulling back from its most overbought reading since the start of 2018. The BKX is also slipping below its 10-week moving average (blue line) for the first time in three months. All of which suggests that banks may have to do some backing and filling to restore their upside momentum. A flatter yield curve is another restraining influence.
HOME CONSTRUCTION ISHARES HIT NEW RECORD...My weekend messageshowed one stock group that has benefited from lower bond yields; and continues to do so. The weekly bars in Chart 5 show the U.S. Home Construction iShares (ITB) rising above its early 2018 peak to establish a new trading record. Home construction stocks have been the strongest part of the Consumer Discretionary SPDR (XLY) over the last year. And are the strongest group in the XLY again today. Lower mortgage rates are a big reason why.
10-YEAR TREASURY YIELD MAY TEST LOWER END OF TRADING RANGE...Chart 6 shows the 10-Year Treasury yield still in a sideways trading range between its November high and its early December low.One of our readers described it as a triangle formation; and he may be right. That's shown by the two green converging trendlines containing the price action. I've drawn another rising red trendline under the early September/October lows. And those two support lines are also converging. With yields under pressure, those support lines may be tested.
