TRADE DEFICIT HURTS DOLLAR AND PUSHES COMMODITIES HIGHER -- BOND YIELDS SURGE AGAIN -- MATERIALS ARE STRONG WHILE FINANCIALS ARE WEAK -- INTEL FALL HURTS CHIPS -- IT LOOKS LIKE ANOTHER MARCH TOP
BOND YIELDS BREAKOUT ... With each passing day the headlines get worse for the dollar, bonds, and stocks while supporting rising commodities and stocks tied to those commodities. That's an intermarket recipe for building inflation pressures with higher interest rates, which may have already ended the cyclical bull market in stocks. Today's bad news started with a big jump in January's trade deficit. That weakened the dollar and pushed gold, oil, and most other commodities higher. That also pushed long-term rates sharply higher. On Wednesday, I showed the 10-year T-Note yield breaking out to a seven-month high. Today's surge in bond yields confirms that Wednesday's upside breakout was no fluke. Long-term rates are finally headed higher. I also mentioned at midweek that financial stocks (and REITS) were especially vulnerable to rising rates. Not surprisingly, both groups were among Friday's biggest losers.
Chart 1
FINANCIALS FALL WHILE MATERIALS GAIN ... On Wednesday, I showed a ratio of the Materials SPDR (XLB) divided by the Financials SPDR (XLF) breaking out to a new three-year high a month ago. That told me that the scale has tipped in favor of inflation and higher interest rates. That pattern held true again on Friday as Materials were the day's strongest group while Financials were one of the weakest (second only to technology). I also mentioned that rate-sensitive stocks were normally the first to peak in a topping stock market, while while commodity-type stocks were the last. Chart 2 shows the Financials SPDR falling sharply at week's end on rising volume. It's relative strength has fallen to the lowest level in a year. Meanwhile, the relative strength line for materials keeps rising. The XLB was pulled higher on Friday by steel (Nucor), copper (Phelps Dodge), and paper (Georgia Pacific). Nucor was the star performer and gapped up on very heavy volume after bouncing off its 50-day average (see Chart 4).
Chart 2
Chart 3
Chart 4
INTEL BREAKOUT FAILS -- CHIPS FALL HARD... Chips had a very bad day today and lot of that had to do with intel. On Tuesday, the chip bellwether had broken through its November peak in an apparent breakout attempt. It didn't hold for long. By week's end, the stock tumbled well below the breakout point and on very heavy volume. [Intel was the day's most actively traded stock]. And that came after some positive news released after the close on Thursday. That really hurt the Semiconductor Holders (SMH) which fell 2.5% today to record the day's worst drop. It too fell on heavy volume. With the chips falling so hard, and failing the challenge of their December peak, the Nasdaq fell harder than the other market averages. Selling in the Nasdaq 100 appeared to rule out any hope of new technology leadership.
Chart 5
Chart 6
NASDAQ 100 NEARS TEST OF 200-DAY LINE... Since December, the Nasdaq 100 has been the weakest of the major indexes. Its daily chart shows it trading near its 2005 low -- while the S&P 500 hit a multi-year high a week ago. That's a major negative divergence which is one of the reasons that I've been very skeptical about the staying power of the recent upleg in the blue chip averages. The QQQQ underperformance is better seen in its falling relative strength line (vs. the S&P 500). I've written many times over the last year that it's very hard for the market to rally without Nasdaq leadership. After failing a couple of challanges of its (blue) 50-day average, the Nasdaq 100 Shares are close to testing their (red) 200-day average. That will be an important test for it and the rest of market, which may also have peaked.
Chart 7
FIFTH AND FINAL UPWAVE MAY HAVE ENDED ... My Elliott wave analysis had called for one more move into new high ground to complete the cyclical bull market that started in October 2002. Although it fell a bit short ( by less than 2%) of my upside target for the S&P 500, I now believe that the fifth and final upwave may have already ended. I showed some of those reasons on Wednesday, but here they are again. For one thing, last week's upside breakout came on light volume, while this week's price drop came on heavy volume. Short-term indicators (like RSI and MACD) have turned negative. [The weekly RSI and MACD lines are also rolling over]. As a result, the S&P suffered a downside weekly reversal at a critical time. Not a good sign. The S&P SPDR (SPY) is testing an uptrend line starting at its late-January low. A break of that line would be another bad sign. And, as I wrote on Wednesday, any close beneath its late-February low at 118.58 would, in my view, pretty much confirm that an important top has been seen.
Chart 8
BEWARE THE IDES OF MARCH ... Based on seasonal considerations, I thought the fifth upwave could last into April. I should have looked at the calendar a bit more closely. I now think the odds for a market top during the current month of March is more likely. Markets have a way of turning on anniversary dates. I mentioned on Wednesday that this month marked the two year anniversary of the bottom that took place in March 2003 (see green arrow). Yesterday marked the fifth anniversary of the March 2000 peak (first red arrow). The second red arrow shows that March 2002 also started the last leg down of the major bear market. In the five years since the start of 2000, the month of March has started three important trends -- one up and two down. In my view, that greatly increases the chances of a March top during 2005 -- especially given the market's weak technical condition and all of the negative intermarket influences that are developing.
Chart 9
