Another day, another melt up for U.S. stocks, albeit only marginally. With each passing day, it has grown more dangerous to chase this epic bear-killer run, which now measures 16% for the benchmark S&P 500.
The question we asked ourselves Wednesday on a conference call with hedge fund traders was, “With such severely overbought readings, who in their right mind would still buy stocks?”
The answer is, fewer and fewer people. Market breadth has been weakening since late March, and at this point, the broader market is being held up by a few heavily weighted large-cap stocks.
On Wednesday, the S&P 500 kissed a resistance zone that has been in place since early 2015.
As I’ve said, a sustainable breakout to fresh highs is very unlikely given the distance the index has travelled since the depths of February and the very overbought momentum oscillators such as the MACD. Now, I’m not saying the index can’t push marginally higher, but I must caution against throwing new money into intermediate-term trades or investments.
For the next chart, I have plotted the CBOE Interest Rate 10 Year T Note (TNX) on the top and PowerShares DB US Dollar Index Bullish (UUP) on the bottom. As the dollar rose Wednesday, it pulled bond yields along with it.
Bond yields are now back above their 21-day moving average (yellow line), and the dollar looks like it wants to rebound. Keep in mind that the slumping U.S. dollar is a major reason for the rebound in energy stocks and other areas off the early 2016 lows. If the greenback reverses course, bond yields could rise quickly and stocks may begin to correct. This is a crucial dynamic that stock market operators watch closely.
As a result of Wednesday’s move higher in the dollar and bond yields, yield-sensitive utility stocks came under pressure. The Utilities SPDR (ETF) (XLU) broke below the neckline of the head-and-shoulder pattern it had been tracing out since mid-March.
I see XLU falling to the mid- to low $40s for a better mean-reversion move.
So, with the dollar and bond yields bouncing on Wednesday, utilities dropping in kind and stocks eking out only marginal gains, I continue to wave the caution flag on stocks as we plow through the second half of April.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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