THE DOW AND NYSE COMPOSITE INDEXES ARE BACKING OFF FROM 200-DAY AVERAGES -- SO ARE SOME KEY GROUP INDEXES -- RISING COMMODITIES MAY LIMIT PROFIT POTENTIAL IN BONDS

FINANCIALS AND RETAILERS IN PARTICULAR... During the recent market rally, one of the resistance lines that we've been watching especially closely is the 200-day moving average. While that long-term line is a support line during bull markets, it's usually a resistance barrier during bear market rallies. I'm particularly struck by the number of groups indexes that are starting to back off from that important moving average line. Most of them are in the key financial and consumer discretionary groups. Chart 1, for example, shows the Bank Regional Holders nearly touching that line last Friday before backing off this week. Chart 2 shows the Consumer Discretionary SPDR doing the same. Chart 3 shows the S&P Retail Index backing off from its 200-day line and its January peak. Those groups are among today's biggest losers. I wrote yesterday that the stock market had reached a moment of truth where new selling could be expected. It's not a good sign for the market when the key groups shown below are leading it lower. Several major market indexes are testing their 200-day lines as well.

Chart 1

Chart 2

Chart 3

DOW AND NYSE TEST 200-DAY LINES... The Dow Industrials and the New York Composite Index are both testing their 200-day lines and are in a short-term overbought condition. Chart 4 shows the Dow touching that resistance line last Friday and backing off since then. The black line below the chart is the 12-day Rate of Change (ROC) line. Although it's still above its zero line (which is positive), it's showing negative divergence from its early April peak (red arrow). Chart 5 give a slightly longer look at the NYSE Composite Index. The negative divergence in its ROC line is a bit more pronounced (red line). That lessening buying pressure comes while the NYSE is testing its 200-day line (red arrow) and a down trendline drawn over its November/December highs. The NYA has also retraced 50% of its October/March decline.

Chart 4

Chart 5

TREASURIES BOUNCE A BIT ... New stock selling over the last two days is pushing some money back into Treasuries. Chart 6 shows the 7-10 Year Treasury Note Fund (IEF) starting to bounce off its February low near 88. Chart 9 shows the 10-Year Treasury Note Yield (TNX) moving to toward its February highs. The TNX is still well below its 200-day average. It seems to me that bond yields are caught in a double bind here. Bond prices usually rise (and yields fall) when stocks are selling off. The upward pull of rising commodity prices and higher inflation expectations, however, could keep bond yields from dropping much further. Although it's taken a long time for it to happen, rising commodity prices may finally start to exert upward pressure on bond yields. Falling stock prices usually give a boost to bond prices. Rising commodity prices, however, may keep any bond boost relatively small. It looks like some of the money leaving stocks is moving back into commodities.

Chart 6

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COMMODITIES ARE STILL TOP GROUP ... Chart 8 plots two relative strength ratios. The red line is the DB Commodities ETF (DBC) and the blue line is the 10-Year T-Note price (IEF). Both are plotted relative to the S&P 500 (black line along the bottom). On a relative basis, commodities and bonds started to pull back in mid-March when the stock market rally started. If stocks start to roll over from here, some money would be expected to rotate back into bonds and commodities. The two lines show, however, that commodities are the strongest asset class by far. That's where most of the money is going.

Chart 8