FED LEAVES RATES UNCHANGED -- MARKET ENJOYS OVERSOLD BOUNCE -- SOX INDEX REACHES SUPPORT
BOND YIELDS DROP... To no one's surprise, the Fed left short-term rates unchanged today. It did, however, seem to soften its description of the economic recovery a bit. That may account for today's drop in long-term rates. Chart 1 shows the 10-year T-note yield closing at the lowest level in eight months. As I suggested last week, that's a mixed message. Lower rates are supposed to be good for stocks. But they also hint at a less optimistic view of the economy. The dollar dropped today as well. Gold prices rose $3 and gold stocks regained some lost ground. The rest of the market also bounced from a short-term oversold condition.
Chart 1
DOW IS OVERSOLD SHORT-TERM... Today's bounce looked like a normal relief rally off a short-term oversold condition. The daily chart of the Dow Diamonds show the daily RSI bouncing off oversold territory near 30. At the same time, the daily stochcastic lines are turning up from oversold territory under 20. The stochastics lines show the Dow to be at the most oversold level since last November. While that may carry some short-term relief, it's the weekly chart that concerns me more. The weekly bars in Chart 3 show both the RSI and stochastic lines turning down. The drop in the weekly stochastic lines has a decidedly negative look to it. In chart work, weekly signals usually override daily signals. That means that any bounce arising from a short-term oversold condition may be limited by the negative condition of the weekly indicators.
Chart 2
Chart 3
NASDAQ STILL ON THE DEFENSIVE -- SOX TESTS SUPPORT... The Nasdaq continues to underperform the rest of the market. The Nasdaq Composite managed only a four point gain today versus 81 points in the Dow. But it did manage to bounce on rising volume. The short-term trend for the Nasdaq is still down with its next support level near its December low around 1900. The Semiconductor (SOX) Index has already reached a potential support level at its December low near 470. Since the SOX has been a major drag on the Nasdaq market, what it does in this area may provide some clues to Nasdaq direction. No doubt a bounce in the SOX today helped steady the Nasdaq a bit.
Chart 4
Chart 5
STILL ON THE DEFENSIVE... Very little has changed over the last couple of days. Last week, most of my Market Messages had a negative tone to them -- especially because longer term indicators started to weaken from major resistance levels. I also warned about the negative sign from the rotation out of the cyclical transportation stocks into the more defensive utilities. That disparity got much worse yesterday when airlines stocks took a big hit. I suspect that Monday's terrorist-inspired selling was overdone which led to today's modest upside adjustment. But, as far as I can see, the market is still in the midst of a downside correction that probably has further to run.
