BOUNCE IN OIL SPOILS EARLY MARKET RALLY -- RISING GOLD PULLING BOND YIELDS HIGHER -- NYSE BULLISH PERCENT INDEX TURNS DOWN
30-YEAR T-BOND YIELD TESTS 200-DAY LINE ... I recently started to look at the 30-year T-bond yield to help determine the direction of long-term rates. That's because the 10-year T-note yield has given some false signals over the last year. Chart 1 shows the 30-year T-bond yield (TYX) jumping back up to its 200-day moving average today. When I last showed this chart a couple of weeks ago, I pointed out the the TYX hadn't closed over its 200-day line for more than a year. That's why I would take an upside crossing at this point in time as a more reliable signal that long-term rates may finally be turning higher. That would be a natural reaction to fears of heightened inflation. While most of the recent attention has been on the inflationary impact of rising oil prices, I think a more serious sign that inflation pressures are building is the continuing rally in gold and gold shares both of which climbed again today. Gold shares were the day's top gainers and have remained the strongest stock group over the last month and the last three months. I think there's a link between rising gold prices and rising bond yields. Historically, rising gold prices have eventually led to rising bond yields. That hasn't been the case over the last three years as gold prices have risen and bond yields have stayed down. Chart 2, however, suggests that may be changing. If you compare the rallies and pullbacks in the two markets over the last year, you'll see a tendency for gold and bond yields to rise and fall together. Gold prices broke out to the upside during September which is when bond yields started to climb as well. That's what should happen as inflation pressures intensify. Neither one is good for the stock market. Nor is rising energy prices.
Chart 1
Chart 2
GOLD STOCKS ARE DOING BETTER THAN ENERGY ... A week ago Friday I suggested that it might be a good time to switch some funds out of the energy sector and into gold. That was based on my belief that oil stocks were over-extended while gold stocks were just starting another leg up. That relationship is seen more clearly in Chart 3 which shows a ratio of the Gold & Silver (XAU) Index divided by the Energy SPDR (XLE). The falling ratio shows that energy stocks have done much better during the first eight months of this year. Since the start of September, however, the ratio has turned up. In my view, that suggests that gold stocks may do better between now and the end of the year than energy.
Chart 3
OIL BOUNCE UNDERCUTS STOCK RALLY ... A lower open in energy prices this morning got the stock market off to a good start. As the day wore on, however, oil prices climbed $1.61 to 65.80 thereby keeping it above important support levels. Energy stocks rallied as well. That undercut the early market rally. Charts 4 and 5 shows the disappointing market reaction. The S&P 500 SPDRs (SPY) ended marginally higher but well below its opening price. The Nasdaq 100 Shares (QQQQ) gave back its early gains to close marginally lower. Volume was light in both cases. In my view, that keeps the market on the defensive. In addition to rising energy prices, the market may also have to contend with rising bond yields as discussed in paragraph one together with a negative seasonal pattern. The NYSE Bullish Percent Index has also turned down.
Chart 4
Chart 5
NYSE BULLISH PERCENT INDEX WEAKENS ... In a mid-August message, I included a headline that read: "NYSE Bullish Percent Index Looks Toppy" (August 19, 2005). It's time to revisit the BPI because it's deteriorated even further. The BPNYA measures the percent of NYSE stocks that are on point & figure buy signals. Chart 6 shows the line over the last three years. Readings under 30 are oversold (and bullish) while readings over 70 are overbought (and potentially bearish). The last oversold reading took place in October 2002 as the market bottomed (green arrow). The chart shows three overbought readings since the the start of 2004 (red arrows). The fact that each successive peak is lower that the previous one is cause for concern because it shows a weakening uptrend. The last two times the line slipped under 70 (the springs of 2004 and 2005) accompanied market corrections. On August 19, I pointed out that the Bullish Percent Index was slipping under 70 which was a caution signal. I wrote, however, that a six-point decline was needed to signal a downturn in the BPI. That has since occurred.
Chart 6
Chart 7
POINT & FIGURE CHART HAS TURNED DOWN ... Chart 7 is a point & figure version of the BPNYA. It shows alternating columns of x's and o's. Each x column represents rising values while the o column shows values falling. To reverse from an up (x) column to a down (o) column, the BPNYA must decline by three boxes. Each box is worth two points. The red numbers show the start of each month. Since the highest value in August was 72, the BPNYA needed to fall to 66 to signal a three-box reversal to the downside. That occurred during the month of September. That in itself isn't an actual sell signal. [An actual sell signal takes place when a column of o's falls below a previous column of o's as occurred in May 2004]. A downside reversal from over 70, however, does increase the market's risk.
