Investing.com - Here’s a look at three things that were under the radar this past week.
1. Dow Makes a Golden Cross
If you weren’t watching technical indicators this week, you may have missed strong signal for blue-chip stocks.
The Dow Jones Industrial Average triggered a signal called the golden cross, which is bullish near term.
A golden cross occurs when a short-term moving average crosses above a long-term moving average. The Dow’s 50-day moving average moved above its 200-day moving average on Tuesday.
This hasn’t happened since April 2016.
Technical analysts note that this isn’t just a license to go out and buy like crazy, as other market forces must be taken into consideration. But historically, the expected pattern has pretty much played out in the short term following the signal.
While "the Dow's returns after golden crosses since 1950 aren't much to write home about, they exceed the index's returns after the ominous-sounding death cross” when the shorter-term moving averages cross below the longer-term ones, Andrea Kramer of Schaeffer’s Investment Research wrote.
By “isolating the data to look at post-golden-cross signals since 2003, the Dow was higher six months and one year later 100% of the time, with stronger-than-usual returns,” Kramer added.
2. Is Shale Making Records Highs or Shrinking?
The headline came Monday and had disappeared by the next day. U.S. oil output from seven major shale formations was expected to reach a record 8.6 million barrels per day in April, according to the Energy Information Administration.
But the oil market’s attention that day was occupied by news that OPEC had canceled an upcoming meeting in April to turn its entire focus to cutting production until another meeting scheduled in June.
Saudi Energy Minister Khalid al-Falih and his Russian counterpart Alexander Novak told reporters that their 24-nation alliance, OPEC+, won’t rest until it achieves what it calls market rebalancing, or, more accurately, the Saudi quest for $80 oil.
Falih said the emphasis on cuts was important, with U.S. shale oil turning out to be more prolific than thought, despite the Saudis consistently exceeding their share of the OPEC+ target to reduce at least 1.2 million bpd in supply this year.
Given Falih’s fear of shale, you would think the EIA forecast for another record high for shale would have garnered as much notice as the OPEC announcements, taking some of the wind out of oil bulls’ sails. But it barely made a ripple, and WTI and Brent crude added another chunk to bring their year-to-date gains to around 30%.
With the EIA flip-flop on production, one also wonders if hydraulically-fracked oil, or for that matter, supply of all U.S. crude, was expanding or shrinking.
In Monday’s update, the EIA said despite the peak shale production likely in April, output would only expand by 85,000 bpd, the smallest monthly increase since May 2018. And just last week, the agency revised down all of U.S. production, saying it had overestimated shale output for December through February.
With Big Oil muscling smaller drillers from U.S. shale patches for a share of the action there, it remains to be seen if the equation will change.
3. Yield Curve Inversion to Trigger Bond Proxy Purchases?
The spread between the 3-Month and 10-Year Treasury yields, the most important part of the yield curve, turned negative on Friday. It’s the first time that’s happened since the financial crisis and it raised fears a recession may be on the horizon.
While this may only be a partial inversion of the curve, other parts of the curve are flirting with an inversion or have also inverted. The 2Y/10Y spread ended day just 11 basis points from the flatline, while the 2Y through 5Y yields are inverted.
The yield curve serves as a kind of doomsday screen for the economy and when it inverts, bad things tend to happen. A yield curve inversion has preceded every recession over the past 60 years.
An inversion of the 2Y/10Y yield curve in 2000 preceded the 2001 U.S. recession and crash of the dot-com bubble. The 2008 recession was preceded by an inversion of the yield curve in 2006.
For most stocks, signs of impending economic doom can smother even the most buoyant rally, evident in the selling in high-flying tech stocks Friday. But defensive sectors like utilities, real estate and consumer staples stood firm relative to the overall selloff.
Bond-proxy stocks are often relied upon for their stable dividends in times of economic malaise, which is often characterized by paltry returns on offer from government bonds.
The SPDR S&P Dividend (NYSE:SDY) ETF, which houses many of these bond proxies, currently yields 2.49%. That is not much higher than the current 10-year yield of 2.45%.
But bond yields look vulnerable. The U.S. economy is certainly stumbling, while international growth has slowed, stagnated or, in some corners, reversed. And the Federal Reserve's dovish monetary policy message earlier this week has all but killed any hopes of a rate hike this year, further denting any hopes of firming in bond yields.
-- Written and compiled by Yasin Ebrahim, Barani Krishnan and Kim Khan