WEAK EMPLOYMENT REPORT CAUSES SOME PRE-HOLIDAY PROFIT-TAKING -- STOCKS RISING IN JAPAN
LOW VOLUME LOSSES... A weak employment report this morning caused a little nervous profit-taking in the stock market. The fact that today is the eve of a three-day weekend may have also caused a little selling. Even with only a half day of trading, volume was very light. We're not inclined to read too much into the day. On balance, the market had a pretty good week. The rallies on Tuesday and Wednesday kept uptrends in intact. Higher volume on both up days was also encouraging. Charts 1 and 2 give a snapshot of the Dow and the Nasdaq Composite Indexes. Their short-term patterns look the same. Both remain above their 50-day lines, which is good. In addition, their stochastic lines have turned positive from oversold territory under 20. We're a little nervous about the fact that the daily MACD lines are still negative. The two lines have converged this week, which is a good sign. But we'd like to see them cross back into positive territory.
Chart 1
Chart 2
BOND YIELDS JUMP... The yield on the 10-year T-note jumped again today. That keeps the yield above its 50-day moving average line. That means that bonds are being sold. There are two ways of looking at that. The good news is that money may be rotating out of bonds and into stocks as investors grow more optimistic about the market and the economy. That might give stocks a boost for awhile. The downside is that rising rates aren't normally good for stocks over the long run. That's one of the reasons we continue to believe that we're in a cyclical bull market within a secular bear trend. If the economy doesn't strengthen, the stock market's gains will be limited. If the economy does recover, interest rates will rise which will slow the recovery. We still think the market can move higher. We just don't think this is the start of a major bull trend. Interestingly, the very same phenomenon seems to be happening in Japan as money is starting to move out of Japanese bonds into their stocks.
Chart 3
STOCKS ARE RISING IN JAPAN. -- BONDS ARE SINKING... The AMEX Japan iShares made the most actives list today. That's not surprising given the two big volume spikes that have occurred over the past two days. Although the EWJ closed marginally lower today, it's had an impressive few weeks. The chart shows it rising to the highest level in ten months. [The 50-day average has also crosses over the 200-day which is a good sign]. Something good seems to be happening in Japan, which has been mired in a deflationary funk for years. It seems that Japanese bond prices have been falling for the first time in awhile. With rates near zero, Japanese bonds can't go up much more. But they were staying up -- until recently. That suggests that some switching is going on with money coming out of JGB bonds and moving into stocks. That's a good sign for Japan and may cause some global money to start moving in that direction.
Chart 4
THE VIX IS STILL LOW BUT IS STAYING THERE... There's good and bad news regarding the CBOE Volatility Index (VIX). The bad news is that it's in the low 20s, which is reflective of a complacent stock market. VIX readings in the low 20s have, in the past, been a prelude to market tops. The good news is that the VIX hasn't started moving up. Our work suggests that the VIX Index needs to rise above 25 to signal a correction in stocks. It closed today under 22. Even so, we're watching it very closely. Any decisive close over 25 would turn us more defensive on the market's short-term trend.
Chart 5
HAVE A SAFE AND HAPPY FOURTH OF JULY...
