BANK WEAKNESS WEIGHS ON MARKET -- PLUNGE IN BOND YIELDS SHOWS FLIGHT TO SAFETY -- THAT'S HELPING GOLD AND TECH STOCKS
BANK INDEX WEIGHS ON STOCKS...Despite day to day volatility, major stock indexes are trying to hold onto small gains for the week and are trying to hold underlying support levels. The black bars in Chart 1 show the S&P 500 bouncing last week off potential support at its December low. The SPX is also trying to stabilize near its 200-day moving average. The main drag on stocks, however, remains the recent collapse in banking stocks. The red bars in the lower box show the KBW Bank Index recently plunging to the lowest level in more than two years. That has raised serious concerns about the stability in the banking system both here and abroad. Bank stocks are in a deeply oversold technical condition which may help them stabilize over the near term. Their long-term trend, however, remains negative which should act as a drag on the broader market. Several intermarket trends also are issuing warnings on stocks. That includes a huge drop in bond yields which reflects a major flight into the safety of bonds.
BOND YIELDS PLUNGE IN FLIGHT TO SAFETY... The most notable intermarket side-effect of falling bank stocks has been a plunge in bond yields. Chart 2 shows the 10-Year Treasury yield falling to the lowest level since last September. The 2-year Treasury yield has fallen even further. As a result, bond prices have risen sharply in a major flight to safety and have done much better than stocks over the last few months.
Chart 3 plots a ratio of bond and stock prices and shows bonds outperforming stocks since last November. The chart also shows the TLT/SPX ratio testing its previous peak formed in December. So far, the ratio rally been relatively contained. A move above that December high, however, would issue a more positive sign for bonds and a negative message for stocks. Two markets that have benefitted from the recent volatility have been gold and technology stocks.
SAFE HAVEN BUYING... The combination of falling bond yields and a weaker dollar has pushed money into gold. Chart 4 shows the Gold Shares SPDR (GLD) surging to the highest level in a year. That's not unusual since gold also has a history of benefiting when investors grow nervous about the health of the stock market and the economy.
Within the stock market, technology stocks have been the month's strongest performer. Chart 5 shows the Technology SPDR (XLK) trading at the highest level since last August. Tech stocks usually benefit when bond yields are falling.
RECESSIONARY WARNINGS...Various intermarket relationships continue to raise concerns about the state of the economy. Falling commodity prices are one of them. Falling commodity prices are one of the signs that rising interest rates may be pushing the economy into recession. Falling commodity prices start to push bond prices higher as the economy weakens. Bond prices outperform stocks in the early stages of a recession. An inverted yield curve is another warning signal. The recent plunge in bank stocks is a direct result of the Fed raising rates so fast over the past year and is another warning of potential economic problems ahead. That greatly complicates the Fed's job of combating inflation while trying to stabilize the banking system. In a recession, stock prices start falling with commodity prices while bond prices rise. The banking crisis may have given us an early warning of that negative scenario.
