WEAK HOUSING AND NEGATIVE PPI BOOST BONDS -- YAHOO PULLS NASDAQ BELOW 200-DAY AVERAGE -- S&P 500 STRUGGLES NEAR MAY PEAK

BOND ETF HITS NEW HIGH ... Chart 1 shows the 7-10 Year Treasury Bond ETF (IEF) over the last eighteen months. I showed a similar chart last Friday to demonstrate how lower inflation pressures (signalled by falling commodity prices) were giving a boost to bond prices. We're seeing more of the same today. On the inflation front, core PPI inflation for August fell for the second month in a row. That's good for bond pricess because it signals lower interest rates. On the economic front, housing starts fell to the lowest level in four years which hints at economic weakness. Both of those trends are good for bond prices. As a result, the IEF is hitting a new eight-month high today (green circle). Some of the money moving into bond is coming out of stocks.

Chart 1

YAHOO TUMBLE PULLS NASDAQ BELOW 200-DAY LINE... Not too long ago I wrote about the importance of the Nasdaq market testing its 200-day moving average. I suggested that the ability of the Nasdaq to rise above (and stay above) that long-term resistance line would tell us a lot about the staying power of the current market rally. In today's trading, the Nasdaq Composite has fallen back below the 200-day average (Chart 2). So has the Internet Index (IIX) in Chart 3 which looks very similar. The main reason for both of those indexes falling today is Yahoo which is tumbling 12% in very heavy trading (Chart 4). That's happening at the same time that an overbought S&P 500 is starting to meet resistance near its May high.

Chart 2

Chart 3

Chart 4

OVERBOUGHT S&P MEETS RESISTANCE AT MAY PEAK ... While the Nasdaq market is struggling with its 200-day average, the S&P 500 is starting to struggle near its May peak. That's not unusual. Short-term selling usually shows up around a previous peak (see circles). That's especially true if the index has reached a short-term overbought condition. The 9-day RSI line (above Chart 5) shows that it has reached overbought territory over 70. It also shows a slight "negative divergence" during the last price runup (down arrow). This would be a logical spot to expect some profit-taking to materialize. Heightened fears of a sharp slump in housing is the likely catalyst for some profit-taking in stocks and some buying in bonds. Assuming a stock pullback does materialize, the first level of important S&P 500 chart support is seen along the 1290 level (green line) which represents the summer highs and the early September low (green arrow).

Chart 5