BANKS AND FINANCIALS HAVE A STRONG DAY -- RUSSELL 2000 ISHARES HIT 7-MONTH HIGHS
FINANCIAL SPDR TRIES TO CLEAR 200-DAY LINE... Higher bond yields and a steeper yield curve usually benefit financial stocks and banks in particular. Which helps explain why financials are starting to attract new buying. Chart 1 shows the Financial SPDR (XLF) trading above its 200-day moving average today for the first time in a month. A decisive close above that red line would be a positive development. The solid line overlaid on the price bars plots a ratio of the XLF divided by the S&P 500. The falling ratio since June reflects weak relative performance for that sector. The ratio has stabilized over the last month, however, and is showing some early signs of bottoming. A close above its September high would be a positive sign. Banks are starting to move higher as well.
BANKS START TO OUTPERFORM... Chart 2 shows the S&P Bank SPDR (KBE) jumping sharply today. It has cleared its 50-day moving average and appears headed for a test of its 200-day line. The solid line shows its relative strength ratio rising as well. That's another sign that investors are starting to show more interest in banks. Banks in particular benefit from higher bond yields and a steepening yield curve. Stronger financial stocks may also be supporting this week's strong performance in small cap stocks.
RUSSELL 2000 ISHARES HIT SEVEN-MONTH HIGH... Chart 3 shows the Russell 2000 iShares (IWM) rising above its August high to reach the highest level since February. Its relative strength ratio (solid line) may be breaking out as well. Yesterday's message suggested that rising bond yields might be driving money into small cap stocks since rising yields suggest more optimism on the economy. Financial stocks play a role as well. While financials account for 15% of the IWM, they're the biggest sector in the Russell 2000 Value iShares (IWN) with a weighting of 26%. Which explains why stronger financial shares give a boost to small cap stocks. Industrial stocks are the second biggest part of small cap value with a weighting of 16%. Stronger industrial shares are also contributing to the small cap rally. Strong small cap stocks are usually a good sign for the stock market and the economy.
