FALLING BOND PRICES ARE HURTING BOND PROXIES LIKE UTILITIES, REITS, AND CONSUMER STAPLES

SEPTEMBER SECTOR RANKING... September has lived up to its reputation of being the year's weakest month.   All major stock indexes have fallen during the month.  And so have most S&P sectors -- except for one.  Chart 1 shows energy being the only sector to end the month in the green.   The ten others have lost ground.   That's not a good track record for them and the market.  It was recently pointed out that energy leadership is usually bad for the rest of the market.   That's because rising energy prices are inflationary and put upward pressure on interest rates.    That's not good for stocks either.  Bond yields rose this week to the highest level in sixteen years.    The recent spike in the ten-year Treasury yield has been the main factor pushing most stocks lower.   Rising bond yields have taken a heavier toll on bond proxies like utilities  and real estate.

UTILITIES AND REITS FOLLOW BOND PRICES LOWER... Chart 1 shows Utilities and Real Estate SPDRS being the weakest sector performers during September.   That's mainly because rising bond yields are pushing bond prices lower.   That's hurting sectors that are usually viewed as bond proxies.   Chart 2 shows the Utilities SPDR (black bars) tumbling to the lowest level in a year.   The green area shows the close correlation between the XLU and falling bond prices.

Chart 3 shows the Real Estate SPDR (XLRE) and bond prices falling together and for the same reasons.   Consumer staples are also being hurt by falling bond prices.   That also explains why utilities, real estate, and consumer staples have been the market's weakest sector over the last quarter.   Those three sectors are usually considered to be defensive in nature and normally do better when investors turn cautious on stocks.   That hasn't been the case over the last quarter.  All three sectors are in oversold conditions, however, and may start attracting some nervous money if stocks continue to weaken.

S&P 500 NEARS TEST OF SUPPORT...Last week's message ended with the following weekly bar chart and suggested that the S&P 500 was headed down for a test of its 40-week (or 200-day) moving average (red arrow).  It's nearing a test of that important red support line.  In addition, the SPX is nearing a test of its rising trendline drawn under its October/March lows (black line).   What it does from there should help determine how serious the current pullback is likely to be.