BEWARE OF SHORT-TERM WHIPSAWS -- USE LONG-TERM CHARTS TO FILTER DAILY SIGNALS -- MORE BOND ETFS ARE BOUNCING

OTHER BOND CATEGORIES ARE BOUNCING... I recently wrote about how investment grade corporate bonds were starting to gain some ground on Treasury bonds. Today, I'm adding two other bond categories to that list. The flat line in Chart 1 is the 20+Year Treasury Bond iShares (TLT) which has been the strongest part of the yield curve over the past few months. That's been partly due to a flight to safety and deflationary concerns. The three other lines in Chart 1 are relative strength ratios versus the TLT. All three bond ETFs have been gaining ground on Treasury Bonds since mid-December. The strongest has been the LQD (blue line) which I wrote about in the earlier article. The next strongest is National Muni Bond Fund (PZA) which is the green line. The next in line is the High Yield Corporate Bond Fund (HYG). Charts 2 through 4 show what those bond ETFs look like. The LQD in Chart 2 is trading well above its 200-day line. The Muni Bond ETF (Chart 3) is testing that resistance line and its early November peak. Chart 4 shows the High Yield Corporate Bond ETF trading at a three-month high and nearing its 200-day line. For those who think that the recent surge in Treasury bond prices is overdone (I certainly do), these other bond ETFs offer some alternatives.

Chart 1

Chart 2

Chart 3

Chart 4

AVOIDING WHIPSAWS ... A few readers asked why I didn't comment on the recent (and brief) upside crossover of the 13-day EMA over the 34-day EMA of the S&P 500. Chart 5 shows that the upside crossover took place on Tuesday, January 6 (first arrow) and lasted for four days before turning negative again on Monday, January 12 (second arrow). Normally, an upside crossing triggers a short-term buy signal. Although I place a lot of confidence in that EMA combination, I decided in this instance to give it a few more days to see if it held up. It didn't. I was suspicious partly because the upside crossover took place on light volume. Also, the market messages written by Arthur Hill and myself that same week expressed caution about a possible rally failure including reference to a bearish "rising wedge" pattern. As a result, I felt comfortable giving the market a few more days to prove itself. I'm glad I did. Chalk it up to experience or luck. Or to the fact that the weekly and monthly EMA lines are still bearish.

Chart 5

WEEKLY EMA LINES ARE STILL BEARISH... It's always a good idea to take longer-term trends into consideration when studying short-term trends. The longer-term trend always takes precedence. Another way of saying that is that short-term buy signals are more valid when the weekly and monthly indicators are pointing up. Short-term buy signals are less valid when the longer-range indicators are pointing down -- as they are now. Chart 6 applies the "weekly" version of the 13-34 EMA combination to the S&P 500 which has been bearish for more than a year and not even close to turning bullish. The minimum requirement for a short-term rally would be an upside crossing of the 13-week EMA. The blue arrow in Chart 6 shows that didn't happen. Chart 7 shows the 65-day EMA (which corresponds to the 13-week EMA) acting as a resistance barrier to the S&P 500. I would have given the daily crossover more credence if the 65-day EMA were broken as well. Obviously, it wasn't.

Chart 6

Chart 7

MONTHLY EMAS ARE STILL BEARISH... The most important trend of all is shown on the monthly S&P 500 chart. The solid line in Chart 8 is the spread between the 13-34 month EMA combination. Although the line is well below its zero line, its direction is the most important indicator. It turned down at the end of 2007 and is still dropping. An upturn in the spread between the two monthly EMA lines (as occurred in early 2003) is an important ingredient in any market bottom. Right now, the black line and the S&P 500 are in the process of challenging their 2003 lows. It's doubtful that short-term rallies will get very far until we see some upside improvement in the weekly and monthly indicators. [You can plot the black line by inserting 13,34,1 into the MACD indicator].

Chart 8