BERNANKE COMMENTS BOOST BONDS AND STOCKS -- BANKS LEAD DAY'S RALLY
MARKET LIKES FED COMMENTS ... The bond and stock markets liked what Mr. Bernanke had to say today before Congress. He indicated that economic growth and inflation were moderating which was taken to mean that the Fed might be nearing the end of its rate hikes. Bond prices rose and yields dropped. The dollar fell as a result and gold bounced. Stocks had a good day as well. Part of that was due to technical reasons with several market indexes testing chart support at their June lows and long-term moving average lines. Today's stock rally was spearheaded by bank stocks. Part of that was due to hopes for lower interest rates and part to strong earnings from Bank of America and JP Morgan. Chart 1 shows the PHLX Bank Index (BKX) climbing back over its 50-day moving average after bouncing off its 200-day twice in the last month. Its relative strength line, which had been slipping since May, turned up as well. Chart 2 shows similar strong chart action in Bank Regional Holders (RKH). That made financial stocks one of the day's strongest sectors.
Chart 1
Chart 2
FINANCIAL SPDR RALLIES ON STRONG VOLUME. ... Financial stocks have held up pretty well this year. The rising relative strength line at the bottom of Chart 3 has been rising since January. And it helped lead today's market rally. The daily price bars show the Financials Sector SPDR (XLF) moving back over its 50-day average after two successful tests of its 200-day line over the last month. Volume picked up noticeably, which is another positive sign for the group. Although banks led the advance, brokerage and insurance stocks also had a good day. That helped set the stage for a strong rally in the rest of the stock market.
Chart 3
S&P 500 BOUNCES OFF 400-DAY AVERAGE ... There are at least three technical reasons why the S&P 500 has reached a critical chart point and why a rally attempt from this spot isn't too surprising.. One is simply the fact that the S&P was testing its June low near 1220 and is bouncing off it. The second is the fact that it was threatening its (green) 400-day moving average line. That long-term support line (which is the equivalent of the 20-month moving average) hasn't been broken in three years. The third factor is the fact that the (blue) 50-day average is testing the (red) 200-day line. That's an important test because the 50-day line hasn't been below the 200-day line in two years. That doesn't mean the market's out of danger. It does means, however that this week's bounce has prevented a major breakdown. A bigger test will be whether or not the S&P (and other market indexes) is able to climb over its early July peak at 1280. That's what it's going to take to improve the market's short- to intermediate-term chart picture.
Chart 4
BONDS RALLY AS DOLLAR DIPS ... The bond market was able to shrug off a couple of rising inflation reports to rally nicely today. Apparently, Mr. Bernanke's comments were what bond bulls were looking for. The daily bars show the 7-10 Year Treasury Bond ETF (IEF) moving up to challenge their June peak. A close above that level (and the 200-day average) would be a positive sign for the bond market. The prospect of lower U.S. rates hurt the dollar and boosted foreign currencies. Chart 6 shows the Euro climbing back over its June low. That gave a boost to the Gold ETF (GLD) which bounced off its 50-day line.
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Chart 7
MORE ON SAR SIGNALS ... I pointed out yesterday that Parabolic SAR system had given a short-term sell signal on the streetTracks Gold Trust Shares (GLD). To give another buy signal, the GLD would have to rise to the last dot which is valued at 66.34 today. But there's more to it than that. Chart 9 applies the SAR dots to "weekly" GLD bars. It shows that the weekly signals have been negative for the last two months. Most of the big gains in gold over the past few years have come when the daily and weekly SAR trends are bullish. At the moment, both are negative. To give us a more convincing sign that the major trend in gold is resuming to the upside, the daily and weekly signals have to turn up. As of today, the GLD would have to reach 67.16 for that to happen.
Chart 8
Chart 9
CRB INDEX BREAKS 50-DAY LINE ... Another sign that the tide may have turned against commodity markets for the time being is yesterday's drop by the Reuters/Jefferies CRB Index below its 50-day moving average. Today's modest bounce still leaves it below that support line. The long-term commodity uptrend is still intact. But recent selling shows a bit more caution in the commodity pits. It remains to be seen if today's dollar drop can repair this week's short-term chart damage to the CRB chart. It also remains to be seen if today's Fed-inspired market moves have any staying power. Usually they don't. As is usual, we'll take our market cues from the charts, not the TV monitors or the newswires.
Chart 10
