BOND YIELDS TOUCH FOUR-MONTH HIGH - THAT'S HELPING FINANCIAL SHARES -- AND VALUE CYCLICAL STOCKS IN GENERAL -- SMALL CAPS SHOW SOME LEADERSHIP
BOND YIELDS TOUCH FOUR-MONTH HIGH... Treasury bond yields continue their rise that started a week ago. And they're overcoming some resistance levels. Chart 1 shows the 30-Year Treasury Yield rising above its late August high to reach the highest level since June. It's also testing its 200-day moving average. Chart 2 shows the 10-Year Treasury Yield touching a four-month high as well. That means that investors are selling Treasury bonds which they usually do when they're more optimistic on the economy. Some of that money coming out of Treasuries is moving into stocks which are having a strong day. Some of the money, however, is moving into cyclical shares that do better in a stronger economy. That includes energy, materials, industrials, and financials which are among the day's biggest gainers. The last time those groups turned higher was during June which also accompanied higher bond yields. That's especially true of financials which are one of the biggest beneficiaries of higher bond yields.
FINANCIAL SPDR NEARS TEST OF 200-DAY LINE...Chart 3 shows the Financial SPDR (XLF) having a strong day and moving up to challenge its 200-day moving average. The green line shows a generally positive correlation between the XLF and the 10-Year Treasury yield over the last six months. An upside spike in the TNX during June produced a strong rally in financial shares. It remains to be seen if this month's upturn in bond yields has a positive impact on the XLF. The same is true of value stocks which usually benefit from higher bond yields.
RISING BOND YIELDS MAY BENEFIT VALUE ISHARES... Financials form a big part of the value universe along with other economically-sensitive cyclical stocks like industrials and materials. Chart 4 shows the S&P 500 Value iShares (IVE) trading above its 50- and 200-day moving averages today. The chart shows the last upturn in the IVE taking place in June along with an upward spike in bond yields. This month's upturn in bond yields may be drawing some money back into value shares which have been market laggards since June.
SMALL CAPS TURN UP... Chart 5 shows the Russell 2000 iShares (IWM) rising above its 50-day average today after recently bouncing off its 200-day line. And they're outpacing large cap stocks for a change. The rally in small caps during June took place while bond yields were rising. This month's upturn in bond yields may be having a positive effect as well. Small cap stocks are closely tied to the domestic economy. Investors usually buy smaller stocks when they turn more optimistic on the economy. Which is what higher yields may be signalling.
