FALLING OIL HELPS BOOST STOCKS -- XLE TESTS 200-DAY LINE -- QQQ TESTS RESISTANCE
PEAK IN OIL LED TO PEAK IN BOND YIELDS... Previous messages have shown a drop in bond yields starting a month ago coinciding with the fourth quarter rally in stocks. But there's another element in that story which is a sharp drop in the price of oil. That's because falling oil prices are disinflationary which usually results in lower bond yields. The black bars in Chart 1 show WTIC Crude oil (through Thursday) falling to a four month low and undercutting its 200-day average. [WTIC gained 3% on Friday and ended the week above $75.00}. The green line shows the 10-Year Treasury yield (TNX) peaking three weeks later which coincided with an upturn in stocks. That drop in energy prices also contributed to this week's falling CPI during the month of October which gave stocks a big boost. Energy stocks have also been the market's weakest sector over the last month which is normally good for bonds and stocks.
OVERSOLD XLE TESTS 200-DAY LINE... Falling energy shares are usually positive for bonds and stocks because that implies falling energy prices and lower inflation. The daily bars in Chart 2 show the Energy Sector SPDE (XLE) falling -10% from its September peak. That being said, the XLE is trying to stabilize at its 2oo-day moving average while in an oversold condition (see RSI and MACD lines). That suggests that the recent drop in the energy patch may be overdone.
NASDAQ 100 TESTS PREVIOUS PEAK... While the fourth quarter rally in stocks in still intact, some overhead resistance barriers are being tested. The most prominent one in Chart 3 shows the Invesco QQQ Trust in the process of testing its July peak while in an overbought condition. A close above that barrier would put the QQQ at the highest level in two years. Chart 4 shows an overbought S&P 500 testing potential resistance around its September highs. Any pullback, however, is likely to be met with more buying as the market works its way through a positive fourth quarter seasonal trend.
RUSSELL 2000 TESTS 200-DAY LINE... Small cap stocks have been attracting a lot of media attention lately because of their historic run of underperforming larger stocks. They've had a relatively strong week. And they're undertaking a test of their own. Chart 5 shows the Russell 2000 iShares (IWM) testing overhead resistance at its 200-day moving average. A decisive close above that barrier would be a positive sign for it and the market. And would help broaden out the overall market rally. Small caps have the biggest contributors to weak market breadth which continues to lag behind behind major stock indexes. Falling bond yields are also helpful to small caps.
