HIGH INFLATION NUMBERS BOOST BOND YIELDS AND DOLLAR -- GOLD SELLS OFF -- WEEKLY AND MONTHLY MACD LINES ARE NEGATIVE WHICH THREATENS BULL TREND -- YEAREND RALLY MAY HAVE COME AND GONE
INFLATION NUMBERS BOOST BOND YIELDS... A rate cut by the Fed on Tuesday, and a coordinated infusion of funds by central bankers on Wednesday, weren't enough to keep the market from falling. Part of the reason for selling late in the week was big inflation jumps in the PPI and CPI. The former had the biggest headline gain in 34 years, while the latter saw the biggest inflation jump in two years. That complicates the job of the Fed which is trying to balance the combined threats of inflation and economic slowing. While it may seem counter-intuitive, those big inflation numbers actually caused profit-taking in gold and oil. Part of the reason is because those high inflation numbers pushed U.S. interest rates higher along with the dollar. Chart 1 shows the Euro closing below its 50-day average for the first time in three months. That pushed gold (and oil) prices lower. Chart 2 shows the Gold ETF (GLD) testing its 50-day moving average. The Market Vectors Gold Miners ETF (GDX) has already broken that support line. Chart 4 shows the yield on the 10-Year T-Note jumping to the highest level in a month. It's not a good sign for long-term rates to be rising while the Fed is lowering short-term rates. That means bond bulls are getting more worried about inflation. Rising bond yields diminish the effects of Fed easing. The Fed controls short-term rates, but inflation expectations drive long-term rates.
Chart 1
Chart 2
Chart 3
Chart 4
RETAIL WEAKNESS IS A BIG PROBLEM ... The next two charts demonstrate part of the reason why recent Fed moves haven't had much of a positive impact on the stock market. It has to do with negative fallout on retail spending resulting from the housing meltdown. The bars in Chart 5 plot the S&P 500 Retail Index, which has been one of the year's weakest groups. The RLX is on the verge of falling to a new three-year low. Its relative strength ratio (solid line) has already reached a five-year low. If the weak performance of retail stocks is a leading indicator of retail spending (which I believe it is), and if retail spending is 70% of the U.S. economy, then Chart 5 carries bad news for the U.S. economy and stock market. What's causing the retail breakdown? Chart 6 overlays the same Retail/S&P 500 ratio over a bar chart of the PHLX Housing Index. Notice the close correlation between the two lines. They both peaked in the middle of 2005 and have been falling together since then. In other words, the housing depression is closely tied to the retail breakdown. That suggests that there's a lot more to worry about than just subprime mortgages and liquidity problems. Which may also explain why recent Fed moves aren't helping much.
Chart 5
Chart 6
WEEKLY MACD LINES ARE STILL NEGATIVE ... The daily bars in Chart 7 show the S&P 500 closing the week back below its 200-day moving average. The "daily" MACD lines are still positive, but are still weakening. The problem with the recent rebound is that many of the longer-term indicators stayed negative. Like the "weekly" MACD lines in Chart 8. For a daily buy signal to work for long, it has to be accompanied (or soon followed) by a weekly buy signal. Chart 8 shows, however, the weekly MACD lines never even came close to turning positive. What's worse, they're starting to weaken again. Unfortunately, it gets even worse.
Chart 7
Chart 8
MONTHLY MACD LINES ARE NOW NEGATIVE ... The MACD histogram bars in Chart 9 measure the distance between the two "monthly" MACD lines (not shown here) for the NYSE Composite Index. A histogram reading below zero means that the MACD lines have turned negative. The last histogram bar on the NYSE chart (for December) has just done that and is in danger giving the first monthly MACD sell signal in this index since the bull market started more than four years ago. [Since we're only at mid-month, this signal is "preliminary". It doesn't become "official" until the end of December]. What it means, however, is that unless the market rallies between now and yearend, the market's long-term uptrend could be in danger. It's no surprise that the market's short-term rally attempt is struggling when its weekly and monthly indicators (which are more important) are negative.
Chart 9
DON'T WAIT FOR SANTA CLAUS... On Friday November 30, I wrote about the deterioration in several long-term indicators and advised readers to "sell any yearend rally". Up until this week, I was hoping for a more substantial rally that could approach the old highs. [The traditional Santa Claus rally actually refers to the week between Christmas and New Years]. This week's disappointing action raises the possibility that the yearend rally may have already come and gone. In other words, don't wait for a month-end Santa Clause rally to do some selling.
