PERCENT OF NYSE STOCKS ABOVE THEIR 200-DAY AVERAGE IS TESTING MAJOR DOWN TRENDLINE -- THE PERCENT OF NYSE STOCKS ABOVE THEIR 50-DAY LINES IS OVERBOUGHT -- ROTATION OUT OF TREASURY BONDS AND INTO HIGH YIELD CORPORATE BONDS IS A SIGN OF CONFIDENCE
% NYSE STOCKS ABOVE 200 DAY MA TESTS DOWN TRENDLINE ... On April 16, I charted showed the improvement in the percent of NYSE stocks trading over their 200-day moving averages. Chart 1 shows that measure bottoming during the fourth quarter and recently moving up to the highest level in six months. As encouraging as that is, it isn't enough to signal the end of the bear market. I suggested in the earlier article that one of the first things that needs to be done is for the indicator to break its two-year down trendline. Chart 1 shows that the indicator is now testing that resistance barrier. That puts this indicator at a critical juncture. [A close over last spring's high at 53% is still needed to signal a new bull market].
Chart 1
% NYSE STOCKS OVER 50-DAY AVERAGE IS OVERBOUGHT ... I also showed the percent of NYSE stocks trading over their 50-day averages. This is a much more volatile indicator and is more indicative of the market's intermediate trend. Readings below 20% are considered to be oversold (as in early March). The move back over the 20% line in mid-March signaled a market bottom (green arrow). Readings above 70% are overbought (as in January and now). That simply tells us that the market rally is getting stretched too far. For a top to occur, however, the black line has to start dropping. Two minor support levels are seen at 80% and 70%. While a drop below 80% would be the first hint at weakness, a drop back below 70% would be more serious. The red arrow shows the January drop below 70 signalling the end of that rally attempt. The fact that the black line has reached the highest level in six years is a sign of market strength. The problem is that a reading in the high 80s is very overbought.
Chart 2
HIGH YIELD CORPORATE BOND PRICES RISE WHILE TREASURIES FALL ... My weekend message made the point that other fixed income groups were rising while Treasuries were losing value. Chart 3, for example, shows the 30-Year T-Bond Yield closing over its 200-day moving average for the first time since last August. When bond yields rise, bond prices fall. That explains why the 20+ Year Treasury Bond Fund (TLT) in Chart 4 is a mirror image of Chart 3 and shows the TLT dipping below its 200-day average today. In my view, the move out of Treasuries is a positive sign because it means that investors are becoming more optimistic about the state of the stock market and the economy. Some inflation fears may explain the recent rotation out of Treasuries and into TIPS. Corporate bonds are also attracting new money. On Saturday, I showed the Investment Grade Corporate Bond Fund (LQD) rallying. Today, I'm showing the High Yield Corporate Bond Fund (HYG). Chart 5 shows that bond fund trading at the highest level in nearly four months and over its 200-day line for the first time since last summer. The willingness to sell Treasuries and buy the HYG suggests that investors are embracing more risk which is a sign of growing confidence. It also shows that investors aren't abandoning the fixed income sector. Just Treasuries.
Chart 3
Chart 4
Chart 5
SHORT-TERM LEVELS TO WATCH ... I warned yesterday that a VIX close over 40 could cause some profit-taking in stocks. The hourly bars in Chart 6 show the VIX dropping 1% and ending just below 38. But the VIX bears watching having reached a potential support area in an oversold condition (as I explained yesterday). The stock market spent most of the day fluctuating between gains and losses before ending slight lower. Trading volume was light which in indicative of indecision on the part of traders. The S&P 500 hourly bars in Chart 7 have a slight "triangular" look to them which is usually indicative of a consolidation pattern (see converging trendlines). The most important feature of Chart 7, however, is the short-term support and resistance levels. A close over 875 is necessary to resume its spring rally. A close below 826 would signal the likely end of that rally. Please keep in mind that hourly bars measure very short-term market moves. They don't tell us anything about the market's main trend. They do help us determine, however, whether the short-term consolidation is just a pause in the spring rally, or whether that uptrend is ending. I happen to believe that the spring rally is part of major bottoming process. The main question mark at the moment is whether the overbought market has much more room to rally before correcting some of that spring advance. At such times, short-term moves revealed on hourly price bars can be very revealing.
Chart 6
Chart 7
