STOCKS GET A TRIPLE WHAMMY -- DOW HITS RESISTANCE AT 50-DAY - INFLATIONARY PRESSURES WEIGH ON BONDS -- NASDAQ HITS RESISTANCE AT GAP -- YEN CARRY-TRADE UNWINDS -- YEN ETF GAPS HIGHER -- BULLS PREFER SOMETHING SWEET
HAWKS, DURABLES AND OIL RATTLE STOCKS... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
Stocks got off to a bad start this morning from rising oil prices and weaker-than-expected durable goods orders. There was a bounce around midday, but stocks got hit again after digesting "hawkish" comments from Fed chairman Bernanke. Just a week after the FOMC policy statement, Bernanke testified before Congress' Joint Economic Committee today and reiterated Fed policy. There were no real surprises in Bernanke's prepared testimony as it echoed the Fed's policy statement from last Wednesday. Bernanke affirmed that core inflation remained "uncomfortably high" and that concerns remained in the housing market. In contrast to last Wednesday, Wall Street was a bit more on edge today and ended the day lower. What a difference a week makes. Just a week ago, the Dow was surging to resistance as the market digested the Fed policy statement. Resistance around 12500 came from the 50-day moving average and broken support. The Dow then stalled for three days and retreated sharply over the last two days. This decline reinforces resistance around 12500 and a break above last week's high is needed for a bullish revival.
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BONDS FEEL THE HEAT... Bernanke's comments also took the wind out of bonds. In addition to Fed policy, the recent surge in oil prices is also stoking inflationary pressures and weighing on bonds. The iShares ~20-year T-Bond Fund (TLT) opened strong and moved above 89 in early trading, but soon peaked and ended the day sharply lower. Bonds did not benefit from a flight-to-quality and TLT is testing support from its 50-day moving average. I find price action since last Wednesday quite noteworthy. Bonds rallied immediately after the Fed policy statement last Wednesday and closed above 89.5. And that was it for the rally. TLT has been under selling pressure the last five days and a break below the 50-day would argue for further weakness towards the 200-day.
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MIND THE GAP... "Mind the gap" is a phrase heard often on the London tube and I heed this advice whenever there is a glaring gap on the price charts. Things started going haywire on 26-Feb when the Nasdaq gapped down and declined on heavy volume. The index went on to break its February and December lows in the process. The gap and support breaks were looking pretty bearish, but the Nasdaq surprised Wall Street with a big surge after the Fed announcement last Wednesday. This surge carried the index back above broken support at 2400 and left many of us scratching our heads. While the post-Fed surge to 2470 was impressive, the Nasdaq did not follow through and failed to fill the late February gap. This is the gap that started the fall in late February and the gap is now becoming resistance. The bulls must fill this space to negate its bearish connotations. Also of note, there are similar gaps in QQQQ, SPY, IWM and DIA.
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YEN CARRY-TRADE UNWINDS ... Further unwinding of the Yen carry-trade pushed the Yen higher today. The carry-trade refers to the practice of borrowing money at low Yen rates and investing that money in other currencies at higher rates. There are three transactions involved. First, an investor would borrow Japanese Yen. Second, these Yen would be converted into another currency such as U.S. Dollars. Third, the proceeds would be used to buy stocks or bonds in the new currency. To give you an idea of the interest differential, the 10-year Treasury bond in Japan yields around 1.67% and the 10-year bond in the U.S. Yields around 4.58%. Yen borrowers can make a few "points" by converting the money to US Dollars and lending this money in the U.S. The same three transactions are performed in reverse to unwind the Yen carry-trade. First, investors must sell their stocks or bonds. Second, they must convert the proceeds back into Yen by buying Yen. Third, they must pay back the borrowed money. This puts downward pressure on securities that were bought with "borrowed Yen" and upward pressure on the Yen as money is repatriated.
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THE YEN'S MASSIVE WEDGE... Even though the weekly chart shows a long-term downtrend for the Yen Index ($XJY), this decline looks like a massive correction and there are signs of firmness at a key retracement. The Yen Index bottomed around 75 in 2002 and advanced to 98 in early 2005. This is a big move for a currency. The index peaked in January 2005 and formed a falling wedge over the next two years. This decline retraced just over 62% of the prior advance and the index found support around 82 earlier this year. Both the Fibonacci retracement and the pattern are typical for corrections. A wedge breakout would be long-term bullish for the Yen and the upside target would be north of 100.
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YEN ETF GAPS HIGHER... Even though the Japanese Yen ETF (FXY) has not been trading very long, there is enough price history for some short-term technical analysis. The ETF was priced to correspond to the Yen Index and this index can be used for long-term assessments. The Japanese Yen ETF (FXY) surged in late February and early March. This surge coincided with a sharp decline in U.S. stocks and the positive correlation is further evidence in favor of the Yen carry trade. The surge in FXY created a short-term overbought condition in early March and such conditions can be worked off with either a correction or a consolidation. The Yen ETF did a little of both with a choppy pullback to around 84.5 and found support near broken resistance. Support held after a gap up today and the Yen looks poised to resume the prior advance.
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LOOKING FOR SOMETHING SWEET... John Murphy has been pointing out leaders in the Consumer Staples sector over the last few weeks and there are two more standouts today. While the market was getting pummeled, sweet-tooth investors were buying up shares in The Hershey Co (HSY) and JM Smucker (SJM). I have never dipped my Hershey bar into a jar of Smuckers grape jam, but investors holding both of these Consumer Staples stocks are no doubt liking the taste today. Chocolate and Jam are also comfort foods that can help sooth market anguish. John featured Hershey (HSY) on 9-Mar and the stock is challenging resistance from its 2006 highs. JM Smucker (SJM) broke to a 52-week high February and surged again today. Relative strength in Consumer Staples stocks reflects a defensive market that prefers safety over risk.
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