STOCK INDEXES TEST MOVING AVERAGE RESISTANCE -- ENERGY AND UTILITIES ARE WEEKLY LEADERS -- DROP IN BOND YIELDS MAY BE HELPING STOCKS
STOCK INDEXES GAIN MORE GROUND... Despite a .75% rate hike by the Fed on Wednesday, and a second quarter of negative GDP growth on Thursday, stock indexes continued to gain ground. And they're in the process of testing some overhead resistance lines. Chart 1 shows the Dow Industrials testing their 100-day moving average line (green line). Chart 2 shows the S&P 500 doing the same. Chart 3 shows the Invesco QQQ Trust already testing its June high and its 100-day average. The June high represents a significant resistance barrier for all three indexes. A strong technology performance has boosted the Nasdaq market. A drop in bond yields may be helping.
BOND YIELDS DROP... Last week's message suggested that falling bond yields since mid-June could be supporting the rebound in stock indexes. Their negative correlation was seen again this week. Chart 4 shows the 10-Year Treasury Yield falling to the lowest level in three months. That seems unusual with the Fed hiking rates again this week. One factor pushing bond yields lower could be this week's negative GDP report for the second quarter in a row. Two consecutive quarters of negative growth are usually the technical definition of a recession. The 2-Year Yield also fell this week but remains above the 10-Year yield keeping the yield curve inverted. An inverted yield curve is another recessionary sign. That may help explain why a defensive sector like utilities had such a strong week.
UTILITIES HAVE A STRONG WEEK... Chart 5 shows the Utilities Sector SPDR (XLU) rising to the highest level in two months and breaking through an overhead resistance line drawn over its April/June highs. That may be another caution signal for the market since utilities are considered to be a defensive sector. The XLU may also be benefiting from the drop in bond yields and a rebound in bond prices.
ENERGY STOCKS REBOUND... Energy stocks were the week's strongest sector owing to a rebound in energy prices. Chart 6 shows the Energy Sector SPDR (XLE) trying to clear its 50-day average after rebounding from its 200-day line. That's worth keeping an eye on. The recent drop in crude oil and other commodities has raised hopes that inflation might be peaking. New buying in that sector could challenge that optimistic view.
STOCK DOWNTREND STILL INTACT... Stocks have had a good month of July. Longer range technical indicators, however, continue to suggest that the bear market remains intact. In addition, a Fed raising interest rates in the face of a slowing economy continues to provide a negative economic environment. High inflation combined with a slowing economy is also the standard definition of stagflation which we haven't experienced since the 1970s.
