DEFLATION FEAR BOOSTS TREASURY BONDS BUT HURTS TIPS -- MARKET BOUNCE HAS BEEN ON LOW VOLUME -- FINANCIALS WEIGH ON MARKET -- WEEKLY AND MONTHLY MACD LINES STILL BEARISH -- TODAY'S 9% DROP PUTS SHORT-TERM BOUNCE IN JEOPARDY

TIPS LAG BEHIND BOND RALLY ... Since commodities prices collapsed at midyear, fears of global deflation have grown. Longer-yielding Treasuries have been the principal beneficiary of that. Today's Fed comment that it may start buying longer-term Treasuries to push bond yields even lower have also given bond prices a big boost. Chart 1 shows the 20-Year Treasury Bond ETF (black line) and the 7-10 Year Bond ETF (IEF) scoring big gains since mid-year. One bond ETF that has lost ground has been the iShares Lehman TIPS Bond ETF (TIP). That's the red line in Chart 1. Treasury Inflation Protected Securities (TIPS) are designed to protect us against inflation, not deflation. Corporate bonds (green line) have also done poorly since they're more closely tied to stocks. That's why most of the bond money is flowing into longer-date Treasuries that thrive on deflation.

Chart 1

YES, UPSIDE VOLUME HAS BEEN LIGHT ... A number of readers correctly pointed out to me that trading volume during the recent market bounce has been declining. And, as they also correctly point out, that's not a bullish sign. The daily price and volume bars show that very clearly during last week's bounce. One mitigating factor in that analysis is that last Wednesday and Friday were basically half days which may have accounted for the declining trade. Even so, declining volume during a rally tells us that the rally is more likely a bear market bounce than the start of a new uptrend. Today's selloff on higher volume is just another sign of longer-term bearish forces still at work. Even a rally to the 50-day average doesn't change the market's major downtrend. Today's 9% drop in the S&P 500 puts the short-term rebound in jeopardy.

Chart 2

THE MARKET NEEDS FINANCIAL LEADERSHIP ... Another reader suggested that we place more emphasis on the Financials SPDR (XLF) because of its importance to the rest of the market. Arthur Hill and myself have written about the need for XLF leadership on several occasions as a necessary ingredient in any market upturn. Chart 3 shows the XLF starting to meet resistance along its October lows. It's leading the rest of the market lower today. The relative strength line below Chart 3 shows that the XLF has been leading the market lower since the start of October. In fact, it's been doing that for the past year. It's doubtful that any serious market upturn will occur without more help from the financial sector.

Chart 3

LONG-TERM MACDS ARE STILL BEARISH ... Last week, I showed a short-term positive divergence in the "daily" MACD lines. A reader suggested that the "weekly" MACD lines showed no positive trend. That's only partially true. Chart 4 overlays the weekly MACD lines on the S&P 500 price bars. The lines turned negative in June and are still negative. The fact that the weekly histogram bars are rising, however, shows some loss of downside momentum and allows for a short-term bounce or a period of stabilization. The real problem is with the monthly chart. Chart 5 applies the monthly MACD lines to the S&P 500. A major sell signal was given last December and is still in effect. Even worse, the monthly histogram bars are still falling. Short-term rallies won't carry too far until we see more signs of improvement in the weekly and monthly MACD lines. Daily signals help determine the market's "short-term" trend. The weeklies and monthlies deal with its major trend. Their signals trump daily signals.

Chart 4

Chart 5