DOW BREAKS SHORT-TERM SUPPORT -- FLATTENING YIELD CURVE HURTS FINANCIALS

DOW UNDERCUTS ITS MAY LOW... Some hawkish comments on interest rates by a member of the Fed this morning is taking a negative toll on stocks.    The Dow is under the most pressure.   Chart 1 shows the Dow Industrials trading below its May low to the lowest level in nearly three months.   The other stock indexes are holding up better.   Chart 2 shows the S&P 500 threatening its 50-day moving average.  Its daily MACD lines  in the middle box, however, have turned negative which is another cautionary sign.   The Nasdaq is holding up much better than the other two indexes.    Chart 3 shows the Nasdaq Composite Index pulling back from potential resistance along its February/April highs.

FINANCIALS SELLOFF ON FLATTER YIELD CURVE... Although all eleven market sectors are in the red, financials are the day's weakest sector.   Chart 4 shows the Financial Sector SPDR (XLF) falling below its 50-day average to the lowest level in two months.    That may seem surprising considering that the more hawkish stance by the Fed could eventually result in higher interest rates.    Over the short run, however, longer bond maturities continue to weaken.   At the same time, short-term yields have jumped sharply this week.  That combination has caused the yield curve to flatten.   That's the green line plotted in Chart 5 (through Thursday) which plots the spread between the 10-year and 2-year maturities.   A flatter yield curve is usually negative for financials, and banks in particular.