RISING ENERGY PRICES AND RISING BOND YIELDS MAY THREATEN OVERBOUGHT STOCK MARKET
RISING ENERGY PRICES MAY BOOST YIELDS... This week's inflation reports sent a mixed message. July's CPI came in lower while July's PPI came in higher. Bond yields, however, gained more ground. The green bars in the upper box in Chart 1 show the 10-Year Treasury Bond yield moving closer to the highest level since last October. The problem may be that July's inflation reports failed to capture that month's rebound in energy prices. Markets, however, know that energy prices are rising. The price of WTIC hit the highest level of the year. The lower box in Chart 1 shows the United States Gasoline Fund (UGA) rising to the highest level in a year. The UGA is an ETF that tracks percentage changes in gasoline futures prices. It's only a matter of time before rising energy prices boost inflation numbers. Energy stocks are also rising.
RISING ENERGY STOCKS... Last week's message suggested that energy stocks were breaking out to the upside. That view was confirmed by this week's even higher trend. Chart 2 shows the Energy SPDR (XLE) trading well above its spring high and heading toward its early 2023 high. Last week's message also showed the Market Vectors Oil Services ETF (OIH) hitting a new multi-year high. Chart 3 below shows the S&P Oil & Gas Exploration & Production SPDR (XOP) rising to a new 2023 high. Those two groups are leading the entire energy sector higher. It was also suggested that rising energy prices carried good news for energy stocks, but potentially bad news for interest rates. Rising energy prices and higher interest rates could also cause problems for an overbought stock market.
WEEKLY S&P 500 CHART SHOWS OVERBOUGHT READING... Two factors that could weigh on stocks is an overbought reading and seasonal considerations. The upper box in Chart 4 shows the 9-week RSI line starting to weaken after reaching overbought territory over 70. That's a sign that the SPX could be losing upside momentum. The chart also shows the weekly SPX price bars falling back to their 10-week (50-day) moving average which is their first line of support. The Nasdaq market which is being hurt by weaker technology stocks has already slipped below its blue line. The SPX is also testing potential overhead resistance. The weekly bars in Chart 5 show the S&P 500 Unweighted Index stalling near potential overhead resistance at its early 2023 high. That reflects relative weakness in small cap stocks. That would be a logical spot for an overbought stock market to encounter some selling. Seasonal factors are also a concern.
AUGUST AND SEPTEMBER ARE SEASONALLY WEAK MONTHS... Chart 6 shows the monthly performance of stocks over the past ten years. And they show August and September to be two of the weakest months of the year over that time span. The Stock Traders Almanac also shows August and September to be the market's two weakest months since 1950.
