10-YEAR T-NOTE YIELD HITS FOUR-YEAR HIGH -- JAPAN'S EMERGENCE FROM DEFLATION IS A BIG REASON WHY -- OVERBOUGHT GOLD MARKET PULLS BACK FROM $600 -- APRIL ENDS STRING OF BEST SIX MONTHS
30-YEAR T-BOND YIELD EXCEEDS 5% ... A strong employment report today finally pushed long-term rates above key chart and psychological barriers. That's having a ripple effect through all of the financial markets. It's giving a boost to the dollar which may be contributing to profit-taking in gold and other commodity markets. It's also causing nervous profit-taking in stocks especially those that are sensitive to rising interest rates. The weekly bars in Chart 1 show the 30-Year T-Bond yield moving over 5% for the first time since 2004. That just adds more fuel to the argument that the long-bond yield formed a major double bottom from 2003 to 2005 (see circles) and is on the way to higher levels. The next major upside target is the spring 2004 peak near 5.50%. The 10-year yield has already exceeded its 2004 high.
Chart 1
10-YEAR YIELD HITS FOUR-YEAR HIGH... The weekly bars in Chart 2 show the 10-Year Treasury Note yield moving above its spring 2004 peak at 4.90%. That major upside breakout appears to have ended four years of relatively flat (basing) action that has characterized long-term interest rates, and resolves the so-called "conundrum" that puzzled even Mr. Greenspan when long-term rates stayed down much longer than most market analysts thought they would. I've suggested many times that I believe that the recent upmove in U.S. bond yields is tied mainly to global trends and especially those in Asia. I believe that Japan's emergence from an eight-year deflation is tilting the monetary scale toward inflation and is the primary reason why global bond yields are rising.
Chart 2
A RISING JAPAN BOOSTS U.S RATES ... Chart 3 is an attempt to show the influence of Japan on U.S. rates. The green line is the 10-year T-note yield. The orange line is a ratio of the Nikkei 225 to the S&P 500. The chart starts in 1998 when Japan slipped into a deflation which, in my view, had a restraining effect on global bond yields. The point of the ratio line is to compare Japan's performance to that of the U.S. stock market. From 1998 to the spring of 2003, the falling orange line showed Japan's underperformance. During those five years, U.S. bond yields declined as well. The Japan/U.S. stock ratio bottomed in the spring of 2003 and has since risen to the highest level in six years. Notice that bond yields (the green line) bottomed at the exact point that Japan started to outperform the U.S. (see circle). The 10-year T-note yield has just reached a new four-year high. In my view, the relatively stronger Japanese performance starting in 2003 was an early sign that its economy was starting to emerge from its deflationary problems. That was confirmed by positive Japanese inflation figures during the first quarter of this year. I believe that is the major factor that is pushing U.S. bond yields higher.
Chart 3
EURO BACKS OFF FROM JANUARY PEAK ... On Thursday, the ECB surprised most of us by keeping short-term rates flat. It was widely expected (especially by currency traders) that the ECB was about the raise rates again. Its failure to do so caused the Euro to suffer a "downside reversal day" at its January high near 123. Today's strong U.S. employment report weakened the Euro even further as the dollar rebounded. Although I happen to believe the Euro pullback is temporary, it was probably enough to cause some profit-taking in commodity markets and gold in particular. Gold had also reached another major round number at $600 where some profit-taking was to be expected.
Chart 4
OVERBOUGHT GOLD BACKS OFF FROM $600 ... Gold has a long history of stalling around big round numbers. That's why this week's pullback from $600 shouldn't come as a surprise. The daily bars in Chart 5 show a couple of other reasons why some traders chose to lock up some profits. For one, the 9-day RSI (gold line) for the streetTracks Gold Trust Shares (GLD) has moved into overbought territory over 70 (upper horizontal line) . For another, the GLD is backing off from its upper Bollinger band (blue line). Notice the upturn in the lower band. That may have some short-term significance. That's because the rising lower band is causing the bands to narrow a bit. That can be seen more clearly in the Bollinger Band Width (BB) line beneath Chart 5. The BB line has been rising since late March when the latest gold rally began. That simply means that the bands are widening. The BB line has started to dip a bit. That suggests that the two bands may be narrowing which usually suggests a short-term pullback or consolidation. Another explanation for the pullback in bullion has to do with the fact that some key gold stocks are stalling.
Chart 5
GOLD BUGS INDEX AND FCX PULLBACK FROM JANUARY PEAK ... The next two charts also suggest a couple of technical reasons behind today's drop in bullion. The Gold Bugs Index ($HUI), which has been stronger than the XAU, is backing off from its January high near 350. That's pretty normal action. The action of Freeport McMoran Copper & Gold is even more compelling. Chart 7 shows that stock pulling back from its January peak just above 64. That's not surprising considering that the stock had gained 40% since bouncing off its 200-day average just a month ago. FCX also happens to be one of the most heavily weighted stocks in the HUI and the XAU. I doubt that anything significant is happening here. The heavy media coverage of gold hitting $600 was another clue that the metals markets were due for a pause. And I suspect that's all we're getting here.
Chart 6
Chart 7
DAILY MACD TURNS DOWN FOR S&P... Today's major upside breakout in bond yields may finally be starting to hurt the stock market. The daily S&P 500 bars in the next chart show why. The S&P 500 hit a new five-year today before suffering a downside reversal. What's troubling about the chart is that the daily MACD lines haven't confirmed the S&P's recent five-year high and is in fact turning down. The first key support levels to watch are last week's lows at 1291 and the 50-day average at 1287. Closes beneath either/or both of those levels would weaken the market's short-term trend and might cause more profit-taking. I'm a little more worried about the deterioration in the S&P weekly chart.
Chart 8
WATCHING THE WEEKLY LINES ... The weekly MACD lines are still positive, but only barely. The weekly S&P bars in the next chart show the MACD lines throughout the market's last bull run that started in the spring of 2003. Notice that the MACD lines turned up well before the market did in the fourth quarter of 2002. What troubles me here is that the MACD lines are diverging noticeably from the rising S&P bars. And it wouldn't take much to turn them negative. The fact that the S&P is stalling near 1300 also has some significance. The last time I showed the monthly S&P chart, I pointed out that the next upside target (and potential resistance barrier) was at spring 2001 peak at 1315 (first down arrow in Chart 10). The S&P touched 1314 today before turning lower. The fact that the S&P has retraced two-thirds of its 2000-2002 bear market also puts it in a potential resistance zone. There are also seasonal factors that suggest more caution at this point.
Chart 9
Chart 10
APRIL USUALLY ENDS SIX MONTH MARKET RUN... The month of April is usually a strong market month. That's the good news. The bad news is that April ends the "Best Six Months" run that starts in November. The Stock Traders Almanac points out that the six months from the start of November to the end of April are consistently stronger than the six months from the start of May to the end of October. Hence the well-known phrase "Sell in May and go away". Page 52 in the 2006 version of the Almanac (written by Yale and Jeffrey Hirsch) makes mention of an even better way to time those six month entry and exit points. According to Hirsch, an MACD sell signal after April 1 justifies a slightly earlier exit from the market. There may be another reason to pay more attention to this year's seasonal trend. That's because the market has a history of selling off into a major bottom in the fourth quarter of every fourth year. The last two bottoms occurred in 2002 and 1998. Another major bottom is due in October of this year (2006). The problem is that the market usually weakens in the months prior to that bottom. That could make the next six month period after April even more dangerous. [I highly recommend the 2006 Stock Trader's Almanac. It's available in the Stockcharts.com bookstore].
